NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
As of September 30, 2022 and December 31, 2021,
and for the three and nine months ended September 30, 2022 and 2021
(US Dollars in thousands, except share data)
Note 1. Description of the Business
Overview of the Business
The Oncology Institute, Inc. (“TOI”) is the successor entity to DFP Healthcare Acquisitions Corp. ("DFPH"). DFPH is a Delaware corporation originally formed in 2019 as a publicly-traded special purpose acquisition company for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization, or similar business combination ("Business Combination"). TOI was originally founded in 2007 and is a community oncology practice that operates value-based oncology services platforms. TOI has four wholly-owned subsidiaries, TOI Parent, Inc. ("TOI Parent"), TOI Acquisition, LLC (“TOI Acquisition”), The Oncology Institute of Hope and Innovation Patient Safety Organization, LLC, and TOI Management, LLC (“TOI Management”). Additionally, TOI Management holds master services agreements with affiliated physician-owned professional entities ("TOI PCs") that confer controlling financial interest over the professional entities and their wholly-owned subsidiaries (TOI PCs, together with TOI, the “Company”).
On November 12, 2021 ("Closing Date"), the Business Combination closed following a series of mergers, which resulted in DFPH emerging as the parent of the combined entity Orion Merger Sub II, LLC and TOI Parent (together, "Legacy TOI"). DFPH was renamed “The Oncology Institute, Inc.” and common stock and "Public Warrants" continued to be listed on Nasdaq under the ticker symbols “TOI” and “TOIIW,” respectively (See Note 16).
Operationally, the Company’s medical centers provide a complete suite of medical oncology services including: physician services, in-house infusion and pharmacy, clinical trials, radiation, educational seminars, support groups, counseling, and 24/7 patient assistance. TOI’s mission is to heal and empower cancer patients through compassion, innovation and state-of-the-art medical care. The Company brings comprehensive, integrated cancer care into the community setting, including clinical trials, palliative care programs, stem cell transplants, transfusions, and other care delivery models traditionally associated with non-community-based academic and tertiary care settings. In addition, the Company, through it consolidating subsidiary Innovative Clinical Research Institute, LLC ("ICRI"), performs cancer clinical trials through a network of cancer care specialists. ICRI conducts clinical trials for a broad range of pharmaceutical and medical device companies from around the world.
The Company has 100 oncologists and mid-level professionals across 60 clinic locations located within five states: California, Florida, Arizona, Nevada, and Texas. The Oncology Institute CA, a Professional Corporation ("TOI CA"), one of the TOI PCs, is comprised of the clinic locations in California, Nevada, and Arizona. The Company has contractual relationships with multiple payors, serving Medicare, including Medicare Advantage, Medi-Cal, and commercial patients.
Note 2. Summary of Significant Accounting Policies
Unaudited Interim Financial Information
The accompanying interim condensed consolidated financial statements are unaudited and have been prepared in accordance with Article 10 of Regulation S-X issued by the Securities and Exchange Commission ("SEC"). Accordingly, they do not include all of the information and note disclosures required by U.S. generally accepted accounting principles ("GAAP") for complete financial statements. However, the Company believes that the disclosures are adequate to ensure the information is not misleading. In the opinion of management, all adjustments (of normal and recurring nature) considered necessary for fair presentation have been reflected in these interim statements. As such, the information included in the accompanying unaudited interim condensed consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements and notes as of, and for the year ended December 31, 2021, issued on March 11, 2022.
Principles of Consolidation
The accompanying condensed consolidated financial statements include the accounts of TOI, its subsidiaries, all of which are controlled by TOI through majority voting control, and variable interest entities (“VIE”) for which TOI (through TOI Management) is the primary beneficiary. The Company consolidates entities in which it has a controlling financial interest based on either the variable interest entity or voting interest model. All significant intercompany balances and transactions have been eliminated in consolidation.
Variable Interest Entities
The Company consolidates entities for which it has a variable interest and is determined to be the primary beneficiary. Noncontrolling interests in less-than-wholly-owned consolidated subsidiaries of the Company are presented as a component of total equity to distinguish between the interests of the Company and the interests of the noncontrolling owners. Revenues, expenses, and net income from these subsidiaries are included in the consolidated amounts as presented on the Condensed Consolidated Statements of Income (Operations).
The Company holds variable interests in clinical practices, TOI PCs, for which it cannot legally own, as a result of entering into master services agreements ("MSAs"). As of September 30, 2022, TOI held variable interest in TOI CA, The Oncology Institute FL, LLC, a Professional Corporation ("TOI FL"), and The Oncology Institute TX, a Professional Corporation ("TOI TX"), all of which are VIEs. The Company is the primary beneficiary of the TOI PCs and thus, consolidates the TOI PCs in its financial statements. As discussed in Note 17, the shareholders of the Company's consolidating VIEs own a minority of the issued and outstanding common shares of the Company.
Business Combinations
The Company accounts for all transactions that represent business combinations using the acquisition method of accounting under Accounting Standards Codification Topic No. 805, Business Combinations (“ASC 805”). Per ASC 805, the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquired entity are recognized and measured at their fair values on the date an entity obtains control of the acquiree. Such fair values that are not finalized for reporting periods following the acquisition date are estimated and recorded as provisional amounts. Adjustments to these provisional amounts during the measurement period (defined as the date through which all information required to identify and measure the consideration transferred, the assets acquired, the liabilities assumed, and the noncontrolling interests obtained, limited to one year from the acquisition date) are recorded when identified. Goodwill is determined as the excess of the fair value of the consideration exchanged in the acquisition over the fair value of the net assets acquired.
The DFPH-Legacy TOI Business Combination was accounted for as a reverse recapitalization. Under this method of accounting, DFPH was treated as the “acquired” company for accounting purposes and the Business Combination was treated as the equivalent of Legacy TOI issuing stock for the net assets of DFPH, accompanied by a recapitalization. The net assets of DFPH are stated at historical cost, with no goodwill or other intangible assets recorded. Operations prior to the Business Combination were those of TOI Parent.
Segment Reporting
The Company presents the financial statements by segment in accordance with Accounting Standard Codification Topic No. 280, Segment Reporting (“ASC 280”) to provide investors with transparency into how the chief operating decision maker (“CODM”) manages the business. The Company determined the CODM is its Chief Executive Officer. The CODM reviews financial information and allocates resources across three operating segments: patient services, dispensary, and clinical trials & other. Each of the operating segments is also a reporting segment as described further in Note 20.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates under different assumptions or conditions. Significant items subject to such estimates and assumptions include judgements related to revenue recognition, estimated accounts receivable, useful lives and recoverability of long-lived and intangible assets, recoverability of goodwill, fair values of acquired identifiable assets and assumed liabilities in business combinations, fair value of intangible assets and goodwill, fair value of share-based compensation, fair value of liability classified instruments, and judgements related to deferred income taxes.
Net Income (Loss) Per Share
Basic and diluted net income (loss) per share attributable to common stockholders is presented in conformity with the two-class method required for participating securities. Basic and diluted net income (loss) per share has been retrospectively adjusted for all periods presented prior to the Business Combination. The retroactive adjustment is based on the same number of weighted average shares outstanding in each historical period.
Under the two-class method, basic and diluted net income (loss) per share attributable to common stockholders is computed by dividing the basic and diluted net income (loss) attributable to common stockholders by the basic and diluted weighted-average number of shares of common stock outstanding during the period. Diluted net income per share attributable to common stockholders adjusts basic net income per share for the potentially dilutive impact of stock options, restricted stock units, earnout shares (defined in Note 14), public warrants, private placement warrants, and Senior Secured Convertible Notes (defined in Note 11).
The treasury stock method is used to calculate the potentially dilutive effect of stock options, RSUs, public warrants, and private placement warrants. The if-converted method is used to calculate the potentially dilutive effect of the Senior Secured Notes. In both methods, diluted net income (loss) attributable to common stockholders and diluted weighted-average shares outstanding are adjusted to account for the impact of the assumed issuance of potential common shares that are dilutive, subject to dilution sequencing rules. The earnout shares are contingently issuable; therefore, the earnout shares are excluded from basic and diluted EPS until the market conditions have been met (see more detail on the earnout shares in Note 14). For the periods presented, the public and private placement warrants are out of the money; therefore, the public and private placement warrants are antidilutive and excluded from diluted net income per share.
Fair Value Measurements
The Company accounts for fair value measurements under Accounting Standards Codification Topic No. 820, Fair Value Measurements (“ASC 820”). The Company uses valuation approaches that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The Company determines fair value based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels (see Note 7 for further discussion):
Level 1inputs: Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date.
Level 2inputs: Other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.
Level 3inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at measurement date.
The Company's fair value measurement methodology for cash and cash equivalents, accounts receivable, other receivables, and accounts payable approximates fair value because of the short maturity and high liquidity of these instruments. Fair value measurement of investment securities available for sale is based upon quoted prices from active markets, if available (Level 1). If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation methodologies. Level 2 investment securities include US Treasuries purchased in the secondary market that use pricing inputs other than quoted prices in active markets and fair value is determined using pricing models or other valuation methodologies such as broker price indications, which are based on quoted prices for identical or similar notes, which are Level 2 input measures. Fair value measurements of derivative warrants and earnout liabilities are based on Binomial Lattice and Monte-Carlo Simulation Models, respectively, which are considered to be Level 3 fair value measurements. The primary unobservable input utilized in determining the fair value of the derivative warrants and earnouts is the expected volatility of the common stock. Fair value measurements of the convertible note warrant and conversion option derivative liabilities are based on the Black-Derman-Troy model implemented in the Binomial Lattice and Black-Scholes Models, which are considered to be Level 3 fair value measurements. The primary unobservable input utilized in determining the fair value of the convertible note warrant and conversion option derivative liabilities is the expected volatility of the common stock.
Cash and Cash Equivalents
The Company considers all highly liquid investments that are both readily convertible into cash and mature within 90 days from the date of purchase to be cash equivalents. As of September 30, 2022, the Company's cash equivalents consist of U.S. Treasury bills with a maturity date less than 90 days from the date of purchase.
Debt
The Company accounts for debt net of debt issuance costs and debt discount. Debt issuance costs and debt discount are capitalized, netted against the related debt for presentation purposes, and amortized to interest expense over the terms of the related debt using the effective interest method.
The Company accounts for bifurcated, debt-classified embedded features separately as derivative liabilities pursuant to Accounting Standards Codification Topic No. 815, Derivatives and Hedging ("ASC 815"). Bifurcated, debt-classified embedded features are recorded at fair value on the Company's balance sheet with subsequent changes in fair value recorded in the Condensed Consolidated Statement of Income (Operations) each reporting period.
Investments in Marketable Securities
The Company's investments in marketable securities are classified as available-for-sale and are carried at fair value. The Company accounts for its investment securities available for sale using the fair value election pursuant to ASC 825, Financial Instruments ("ASC 825"), where changes in fair value are recorded in unrealized gains (losses), net on the Company's Condensed Consolidated Statements of Income (Operations). The Company determines the appropriate classification of these investments at the time of purchase and reevaluates such designation at each balance sheet date. The Company’s marketable securities are classified as current assets if the maturity date is less than one year from the date of purchase and they may be readily liquidated.
Interest income, realized gains and losses on sales of securities, and other-than-temporary declines in the fair value of marketable securities, if any, are included as a component of other income (expense), net in the Condensed Consolidated Statements of Income (Operations). The cost of securities sold is based on the First In, First Out method.
At each reporting period, the Company evaluates available-for-sale marketable securities, to the extent the fair value option is not elected, for any credit-related impairment when the fair value of the investment is less than its amortized cost. If the Company determines that the decline in fair value is below the carrying value and this decline is other-than-temporary, credit-related impairment is recognized in the Consolidated Statement of Income (Operations) in accordance with ASC 320, Debt Securities. As of September 30, 2022, there were no available-for-sale instruments for which the fair value option was not elected.
Emerging Growth Company
Pursuant to the Business Combination, the Company qualifies as an “emerging growth company,” as defined in Section 2(a) of the Securities Act of 1933 ("Securities Act"), as modified by the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), and has elected to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies.
Further, Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies, but any such election to opt out is irrevocable. The Company has elected not to opt out of such extended transition period which means that when a standard is issued or revised and it has different application dates for public or private companies, the Company, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard. This may make comparison of the Company’s financial statements with another public company which is neither an emerging growth company, nor an emerging growth company which has opted out of using the extended transition period, difficult or impossible because of the potential differences in accounting standards used.
Recently Adopted Accounting Standards
Leases
On January 1, 2022, the Company adopted Accounting Standards Update 2016-02, Leases, with various amendments issued in 2018 and 2019 (collectively, “ASC 842”) using the modified retrospective approach, for leases that existed on January 1, 2022. ASC 842 requires lessees to recognize assets and liabilities for most leases. The Company evaluates whether an arrangement is or contains a lease at contract inception. A lease exists when a contract conveys to the customer the right to control the use of an identified asset for a period of time in exchange for consideration. Upon lease commencement, the date on which a lessor makes the underlying asset available to the Company for use, the Company classifies the lease as either an operating or finance lease. The Company applied certain practical expedients permitted under the transition guidance, including the package of practical expedients, which permits the Company not to reassess its prior conclusions related to lease identification, lease classification, and initial direct costs capitalization. The Company solely acts as a lessee and its leases primarily consist of operating leases for its real estate in the states in which the Company operates. The Company has other operating and financing leases for various clinical and non-clinical equipment.
Generally, upon the commencement of a lease, the Company will record a right-of-use (“ROU”) asset and lease liability. An ROU asset represents the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Lease liabilities are measured at the present value of the remaining, fixed lease payments at lease commencement. The Company uses its incremental borrowing rate, based on the information available at the later of adoption, inception, or modification in determining the present value of lease payments. ROU assets are measured at an amount equal to the initial lease liability, plus any prepaid lease payments (less any incentives received) and initial direct costs, at the lease commencement date. The Company has elected to account for lease and non-lease components as a single lease component for all underlying classes of assets. As a result, the fixed payments that would otherwise be allocable to the non-lease components are accounted for as lease payments and included in the measurement of the Company’s right-of-use asset and lease liability.
Lease arrangements with an initial term of 12 months or less are considered short-term leases and are not recorded on the balance sheet. The operating lease payments are recognized as an expense on a straight-line basis over the lease term. The lease term includes any period covered by renewal options available that the Company is reasonably certain to exercise and any options to terminate the lease that the Company is not reasonably certain to exercise.
The Company displays ROU assets, current lease liabilities, and long term lease liabilities arising from operating leases as separate line items on the condensed consolidated balance sheet. The Company includes ROU assets, current lease liabilities, and long term lease liabilities arising from finance leases within property and equipment, net; accrued expenses and other current liabilities; and other non-current liabilities. As a result of the Company's adoption of ASC 842, the Company recorded an initial adjustment to the opening balance sheet of $16,439 to operating ROU assets, $3,970 to current portion of operating lease liabilities, $13,796 to long term operating lease liabilities, $43 to property and equipment, net; $19 to other current liabilities; and $21 to other non-current liabilities. The impact of ASC 842 was not material to the Condensed Consolidated Statement of Income (Operations).
Other
In May 2021, the FASB issued Accounting Standards Update 2021-04, Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options (“ASU 2021-04”). The guidance in ASU 2021-04 requires the issuer to treat a modification of an equity-classified written call option that does not cause the option to become liability-classified as an exchange of the original option for a new option. This guidance applies whether the modification is structured as an amendment to the terms and conditions of the option or as termination of the original option and issuance of a new option. The Company adopted ASU 2021-04 as of January 1, 2022. The adoption of this guidance did not have a material impact on the Company’s consolidated financial position or results of operations.
Recently Issued Accounting Standards
In June 2016, the FASB issued Accounting Standards Update 2016-13, Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which changes the way entities recognize impairment of many financial assets by requiring immediate recognition of estimated credit losses expected to occur over their remaining life, instead of when incurred. In November 2018, the FASB issued Accounting Standard Update 2018-19, Codification Improvements to Topic 326, Financial Instruments — Credit Losses (“ASU 2018-19”), which amends Subtopic 326-20 (created by ASU 2016-13) to explicitly state that operating lease receivables are not in the scope of Subtopic 326-20. Additionally, in April 2019, the FASB issued Accounting Standard Update 2019-04, Codification Improvements to Topic 326, Financial Instruments — Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments (“ASU 2019-04”); in May 2019, the FASB issued Accounting Standards Update 2019-05, Financial Instruments — Credit Losses (Topic 326): Targeted Transition Relief (“ASU 2019-05”); and in November 2019, the FASB issued Accounting Standards Update 2019-10, Financial Instruments — Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates and ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments — Credit Losses (“ASU 2019-10”), to provide further clarifications on certain aspects of ASU 2016-13 and to extend the nonpublic entity effective date of ASU 2016-13. The changes (as amended) are effective for the Company for annual and interim periods in fiscal years beginning after December 15, 2022. An entity may early adopt ASU 2016-13, as amended, for annual and interim periods in fiscal years beginning after December 15, 2018. While the Company expects its allowance for credit losses to increase upon adoption of ASU 2016-13, the Company does not expect the adoption of ASU 2016-13 to have a material effect on its consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which amends ASC 740, Income Taxes. This new standard is intended to simplify accounting for income taxes by removing certain exceptions to the general principles in ASC 740 and amending existing guidance to improve consistent application of ASC 740. The new standard is effective for the Company beginning January 1, 2022, and for interim periods beginning January 1, 2023. The guidance in the new standard has various elements, some of which are applied on a prospective basis and others on a
retrospective basis with earlier application permitted. The Company is currently evaluating the effect of ASU 2019-12 on the Company’s consolidated financial statements and related disclosures.
In August 2020, the FASB issued ASU 2020-06, Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity ("ASU 2020-06"), which simplifies accounting for convertible instruments by removing major separation models required under current U.S. GAAP. ASU 2020-06 also removes certain settlement conditions that are required for equity-linked contracts to qualify for the derivative scope exception and it also simplifies the diluted earnings per share calculation in certain areas. The new standard is effective for the Company beginning January 1, 2024. The Company is currently evaluating the effect of ASU 2020-06 on the Company’s consolidated financial statements and related disclosures.
In October 2021, the FASB issued ASU 2021-08, Business Combinations: Accounting for Contract Assets and Contract Liabilities from Contracts with Customers ("ASU 2021-08"). Under ASU 2021-08, an acquirer must recognize, and measure contract assets and contract liabilities acquired in a business combination in accordance with ASC 606, Revenue from Contract with Customers (“ASC 606”). The guidance is effective for interim and annual periods beginning after December 15, 2023, with early adoption permitted. The Company will adopt ASU 2021-08 on January 1, 2024 on a prospective basis. The Company does not expect the adoption of this standard to have a material impact on the Company’s consolidated financial statements and related disclosures.
Note 3. Significant Risks and Uncertainties Including Business and Credit Concentrations
Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash, accounts receivable, and investment securities.
Cash accounts in a financial institution may, at times, exceed the Federal Deposit Insurance Corporation coverage of $250 per account ownership category. The Company has not experienced losses on these accounts, and management believes the Company is not exposed to significant risks on such accounts.
The Company’s accounts receivable has implicit collection risk. The Company grants credit without collateral to their patients, most of whom are local residents and are insured under third-party payor agreements. The Company believes this risk is partially mitigated by the Company’s establishment of long-term agreements and relationships with third-party payors that provide the Company with insight into historic collectability and improve the collections process.
The Company's investment securities portfolio is managed by a third party vendor to provide a relatively stable source of investment income from excess liquidity while satisfactorily managing risk, including credit risk, reinvestment risk, liquidity risk, and interest rate risk.
Revenue Concentration Risk
The concentration of net revenue on a percentage basis for major payors for the three and nine months ended September 30, 2022 and 2021 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Percentage of Net Revenue: | | | | | | | |
| Payor A | 12 | % | | 16 | % | | 14 | % | | 17 | % |
| Payor B | 15 | % | | 15 | % | | 16 | % | | 14 | % |
The concentration of gross receivables on a percentage basis for major payors at September 30, 2022 and December 31, 2021 are as follows:
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
| Percentage of Gross Receivables: | | | |
| Payor B | 15 | % | | 19 | % |
| Payor C | 11 | % | | 14 | % |
All of the Company’s revenue is generated from customers located in the United States.
Vendor Concentration Risk
The concentration of cost of sales on a percentage basis for major vendors for the three and nine months ended September 30, 2022 and 2021 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Percentage of Cost of Sales: | | | | | | | |
| Vendor A | 97 | % | | 53 | % | | 69 | % | | 51 | % |
| Vendor B | N/A | | 46 | % | | 29 | % | | 48 | % |
The concentration of gross payables on a percentage basis for major payors at September 30, 2022 and December 31, 2021 are as follows:
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
| Percentage of Gross Payables: | | | |
| Vendor A | 72 | % | | 39 | % |
| Vendor B | N/A | | 47 | % |
COVID-19 Pandemic
In January 2020, the Secretary of the U.S. Department of Health and Human Services (“HHS”) declared a national public health emergency due to a novel strain of coronavirus (“COVID-19”). In March 2020, the World Health Organization declared the outbreak of COVID-19, a disease caused by this coronavirus, a pandemic. The resulting measures to contain the spread and impact of COVID-19 and other developments related to COVID-19 have affected the Company’s results of operations during 2022. Where applicable, the impact resulting from the COVID-19 pandemic during the three and nine months ended September 30, 2022 has been considered, including updated assessments of the recoverability of assets and evaluation of potential credit losses. As a result of the COVID-19 pandemic, federal and state governments have passed legislation, promulgated regulations, and taken other administrative actions intended to assist healthcare providers in providing care to COVID-19 and other patients during the public health emergency. Sources of relief include the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), which was enacted on March 27, 2020, the Paycheck Protection Program and Health Care Enhancement Act (the “PPPHCE Act”), which was enacted on April 24, 2020, and the Consolidated Appropriations Act, 2021 (the “CAA”), which was enacted on December 27, 2020. In total, the CARES Act, PPPHCE Act and the CAA authorize $178,000,000 in funding to be distributed to hospitals and other healthcare providers through the Public Health and Social Services Emergency Fund (the “PHSSEF”). In addition, the CARES Act provides for an expansion of the Medicare Accelerated and Advance Payment Program whereby inpatient acute care hospitals and other eligible providers were able to request accelerated payment of up to 100% of their Medicare payment amount for a six-month period to be repaid through withholding of future Medicare fee-for-service payments. Various other state and local programs also exist to provide relief, either independently or through distribution of monies received via the CARES Act. During the year ended December 31, 2021, the Company was a beneficiary of these stimulus measures. The Company’s accounting policies for the recognition of these stimulus monies is as follows.
The Company directly received $4,993 in Paycheck Protection Program (“PPP”) loans under the CARES Act and indirectly received an additional $332 in PPP loans through acquisitions (see Note 16). PPP loans may be eligible for forgiveness if the funds were used for eligible payroll costs, payments on business mortgage interest payments, rent, or utilities
during either the 8- or 24-week period after disbursement. The Company elected to account for the loans as current debt until such loans were forgiven. Forgiveness for $5,142 of the PPP loans was received during the year ended December 31, 2021. As of September 30, 2022, the balance of all PPP loans has been forgiven. As such, the Company recognized the loan principal balance and accrued interest as a gain on debt extinguishment in the Condensed Consolidated Statement of Income (Operations).
The Company received $2,727 from CMS under the Accelerated and Advance Payment Program which is an advance on future Medicare payments and will be recouped from future payments due to the Company by Medicare after 120 days. Effective October 1, 2020, the program was amended such that providers are required to repay accelerated payments beginning one year after the payment was issued. After such one-year period, Medicare payments owed to providers will be recouped against Medicare payments according to the repayment terms. As of December 31, 2021, the Medicare accelerated payments are reflected within accrued expenses and other current liabilities in the condensed consolidated balance sheets. As of September 30, 2022, the Company repaid all advances received from CMS under the Accelerated and Advance Payment Program.
The Company received funding from United States Department of HHS as part of the Provider Relief Funding under the CARES Act. Provider Relief Funding is paid in the form of a grant and does not require repayment if used to cover lost revenue, as defined, attributable to COVID-19 and healthcare-related expenses, as defined, including qualifying direct labor, paid or purchased to prevent, prepare for, and respond to COVID-19. Under International Accounting Standard No. 20, Accounting for Government Grants (“IAS 20”), grants are recognized when an entity has reasonable assurance that 1) it will comply with the relevant conditions and 2) the grant will be received. The Company recognized $0 in other income related to the HHS funding during the nine months ended September 30, 2022, and recognized $1,023 in other income related to HHS funding during the nine months ended September 30, 2021 by applying IAS 20 by analogy.
Note 4. Accounts Receivable and Notes Receivable
The Company’s accounts receivable consists primarily of amounts due from third-party payors and patients. See Note 2 for a summary of the Company’s policies relating to accounts receivable.
Accounts Receivable as of September 30, 2022 and December 31, 2021 consist of the following:
| | | | | | | | | | | |
| (in thousands) | September 30, 2022 | | December 31, 2021 |
| Oral drug accounts receivable | $ | 3,212 | | | $ | 2,097 | |
| Capitated accounts receivable | 937 | | | 665 |
| FFS accounts receivable | 23,450 | | | 12,530 |
| Clinical trials accounts receivable | 1,944 | | | 1,823 |
| Other trade receivables | 5,277 | | | 2,892 |
| Total | $ | 34,820 | | | $ | 20,007 | |
During the three and nine months ended September 30, 2022, the Company had net reversals of bad debt recoveries of $28 and $110, respectively and bad debt expense of $115, and $292, respectively. Bad debt write-offs were a result of accounts receivable on completed contracts that were deemed uncollectible during the period due to delayed collection efforts. During the three and nine months ended September 30, 2021, the Company had net reversals of bad debt recoveries of $38 and net bad debt recoveries of $684, respectively. There was $16 of bad debt expense recognized during the three and nine months ended September 30, 2021.
Note 5. Revenue
Management recognizes revenue in accordance with ASC 606 on the basis of its satisfaction of outstanding performance obligations. Management typically fulfills its performance obligations over time, either over the course of a single treatment (FFS), a month (capitation), or a number of months (clinical research). Management also has revenue that is satisfied at a point in time (dispensary). See Note 2 for summary of the Company’s policies and significant assumptions related to revenue recognition.
Disaggregation of Revenue
The Company categorizes revenue based on various factors such as the nature of contracts, payors, order to billing arrangements, and cash flows received by the Company, as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Patient services | | | | | | | |
| Capitated revenue | $ | 16,355 | | | $ | 14,124 | | | $ | 44,815 | | | $ | 39,352 | |
| FFS revenue | 28,272 | | 18,843 | | 73,978 | | 53,023 |
| Subtotal | 44,627 | | | 32,967 | | | 118,793 | | | 92,375 | |
| Dispensary revenue | 18,839 | | | 17,918 | | | 57,736 | | | 53,318 | |
| Clinical research trials and other revenue | 1,511 | | | 1,390 | | | 4,530 | | | 5,006 | |
| Total | $ | 64,977 | | | $ | 52,275 | | | $ | 181,059 | | | $ | 150,699 | |
Refer to Note 20 for Segment Reporting for disaggregation of revenue by reporting segment.
Contract Asset and Liabilities
Under ASC 606, contract assets represent rights to payment for performance contingent on something other than the passage of time and accounts receivable are rights to payment for performance without contingencies. The Company does not have any contract assets as of September 30, 2022 and December 31, 2021. Refer to Note 4 for accounts receivable as of September 30, 2022 and December 31, 2021.
Contract liabilities represent cash that has been received for contracts, but for which performance is still unsatisfied. As of September 30, 2022 and December 31, 2021, contract liabilities amounted to $1,278 and $220, respectively. Contract liabilities are included within other current liabilities and presented in Note 9 along with refund liabilities due to materiality.
Remaining Unsatisfied Performance Obligations
The accounting terms for the Company’s patient services and dispensary contracts do not extend past a year in duration. Additionally, the Company applies the ‘as invoiced’ practical expedient to its clinical research contracts.
Note 6. Inventories
The Company purchases intravenous chemotherapy drugs and oral prescription drugs from various suppliers. See Note 2 for a summary of the Company’s policies relating to intravenous chemotherapy and oral prescription drugs inventory.
The Company’s inventories as of September 30, 2022 and December 31, 2021 were as follows:
| | | | | | | | | | | |
| (in thousands) | September 30, 2022 | | December 31, 2021 |
| Oral drug inventory | $ | 3,203 | | | $ | 1,484 | |
| IV drug inventory | 6,815 | | 4,954 |
| Total | $ | 10,018 | | | $ | 6,438 | |
Note 7. Marketable Securities and Fair Value Measurements
The Company accounts for its investment securities available for sale using the fair value election pursuant to ASC 825, where changes in fair value are recorded in Other, net non-operating income (expense) on the Company's Condensed
Consolidated Statements of Income (Operations). The Company’s investment in marketable securities at September 30, 2022 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2022 |
| (in thousands) | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
| Cash equivalents: | | | | | | | |
| U.S. Treasury Bills | $ | 32,400 | | | $ | 1 | | | $ | (1) | | | $ | 32,400 | |
| Marketable securities: | | | | | | | |
Short-term U.S. Treasuries (1) | 29,164 | | | — | | | (10) | | | 29,154 | |
Long-term U.S. Treasuries (2) | 58,267 | | | 12 | | | (64) | | | 58,215 | |
| Total available for sale securities | $ | 119,831 | | | $ | 13 | | | $ | (75) | | | $ | 119,769 | |
(1) Short-term U.S. Treasuries have maturity dates within one year of September 30, 2022.
(2) Long-term U.S. Treasuries have maturity dates after one year through five years of September 30, 2022.
The Company recorded a net unrealized loss of $62 for the three and nine months ended September 30, 2022. At September 30, 2022, 6 securities were in an unrealized loss position. The decline in fair value of our securities since acquisition was attributable to a combination of changes in interest rates and general volatility in the credit market conditions in response to the economic uncertainty caused by the global pandemic, rising inflation and conflict between Russia and Ukraine. We do not currently intend to sell any of the securities in an unrealized loss position and further believe, it is more likely than not, that we will not be required to sell these securities before their anticipated recovery. There were no investment securities held as of December 31, 2021.
The following table presents the carrying amounts of the Company’s financial instruments at September 30, 2022 and December 31, 2021:
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2022 |
| (in thousands) | Total | | Level 1 | | Level 2 | | Level 3 |
| Financial assets: | | | | | | | |
| Cash and cash equivalents | $ | 61,425 | | | $ | 29,025 | | | $ | 32,400 | | | — | |
| Marketable securities | 29,154 | | | — | | | 29,154 | | | — | |
| Non-current investments | 58,215 | | | — | | | 58,215 | | | — | |
| Accounts receivable | 34,820 | | | 34,820 | | | — | | | — | |
| Other receivables | 559 | | | 559 | | | — | | | — | |
| Financial liabilities: | | | | | | | |
| Accounts payable | $ | 11,155 | | | $ | 11,155 | | | $ | — | | | — |
| Derivative warrant liabilities | 1,748 | | | — | | | — | | | 1,748 | |
| Earnout liabilities | 6,197 | | | — | | | — | | | 6,197 | |
| Conversion option derivative liabilities | 12,650 | | | — | | | — | | | 12,650 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| (in thousands) | Total | | Level 1 | | Level 2 | | Level 3 |
| Financial assets: | | | | | | | |
| Cash and cash equivalents | $ | 115,174 | | | $ | 115,174 | | | $ | — | | | $ | — | |
| Accounts receivable | 20,007 | | | 20,007 | | | — | | | — | |
| Other receivables | 1,237 | | | 1,237 | | | — | | | — | |
| Financial liabilities: | | | | | | | |
| Accounts payable | $ | 15,559 | | | $ | 15,559 | | | $ | — | | | $ | — | |
| Derivative warrant liabilities | 2,193 | | | — | | | — | | | 2,193 | |
| Earnout liabilities | 60,018 | | | — | | | — | | | 60,018 | |
The carrying amounts of cash, accounts receivable, other receivables, and accounts payable approximate fair value because of the short maturity and high liquidity of these instruments.
The Company measures its investments at fair value on a recurring basis and classifies those instruments within Level 1 and Level 2 of the fair value hierarchy. Investment securities, including U.S. Treasury Bills purchased in the secondary market and U.S. Treasury bonds, are classified within Level 2 of the fair value hierarchy because pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reporting date, and fair value is determined using models or other valuation methodologies. The Company measures its derivative warrant, earnout, convertible note warrant derivative liability, optional redemption derivative liability and conversion option derivative liability on a recurring basis and classifies those instruments within Level 3 of the fair value hierarchy because unobservable inputs are used to measure fair value. See Note 2 for a summary of the Company’s policies relating to fair value measurements, and Note 11 for more detail on the convertible note warrant, optional redemption, and conversion option derivative liabilities.
The following table presents information about the Company’s Level 3 liabilities that are measured at fair value on a recurring basis at September 30, 2022:
| | | | | | | | | | | | | | | | | |
| (in thousands) | Private Warrant Liability | | Earnout Liability | | Conversion Option Derivative Liability |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Balance at December 31, 2021 | $ | 2,193 | | | $ | 60,018 | | | $ | — | |
| Conversion option derivative liability acquired (See Note 11 for detail) | — | | | — | | | 28,160 | |
| Change in fair value included in other expense | (445) | | | (53,821) | | | (15,510) | |
| Balance at September 30, 2022 | $ | 1,748 | | | $ | 6,197 | | | $ | 12,650 | |
The derivative warrant and earnout liabilities were valued using a Binomial Lattice and Monte-Carlo Simulation Model, respectively, which are considered to be Level 3 fair value measurements. The convertible note warrant and conversion option derivative liabilities were valued using the Binomial Lattice and Black-Scholes Models, which are considered to be Level 3 fair value measurements. The primary unobservable input utilized in determining the fair value of our Level 3 liabilities is the expected volatility of the common stock. A summary of the inputs used in the valuations is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2022 |
| Derivative Warrant Liability | | First Tranche Earnout | | Second Tranche Earnout | | Convertible Note Warrant Derivative Liability | | Conversion Option Derivative Liability |
| Unit price | $ | 4.63 | | $ | 4.63 | | $ | 4.63 | | $ | 4.63 | | $ | 4.63 |
| Term (in years) | 4.12 | | 1.55 | | 1.65 | | 4.86 | | 4.86 |
| Volatility | 49.00 | % | | 45.00 | % | | 45.00 | % | | 40.00 | % | | 40.00 | % |
| Risk-free rate | 4.10 | % | | 4.22 | % | | 4.22 | % | | 4.02 | % | | 4.02 | % |
| Dividend yield | — | | | — | | | — | | | — | | | — | |
| Cost of equity | — | | | 14.00 | % | | 14.00 | % | | — | | | — | |
| | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| Derivative Warrant Liability | | First Tranche Earnout | | Second Tranche Earnout |
| Unit price | $ | 9.75 | | $ | 9.75 | | $ | 9.75 |
| Term (in years) | 4.87 | | 1.87 | | 2.87 |
| Volatility | 12.80 | % | | 35.00 | % | | 35.00 | % |
| Risk-free rate | 1.24 | % | | 0.94 | % | | 0.94 | % |
| Dividend yield | — | | | — | | | — | |
| Cost of equity | — | | | 11.14 | % | | 11.14 | % |
On August 9, 2022, the Company issued a senior secured convertible note that contains embedded warrant, optional redemption, and conversion option features. Due to the economic disincentive to redeem and the make whole amount that would be required to be paid, it is highly unlikely that the optional redemption would occur, reducing the value during the
period to a qualitatively immaterial amount. See Note 11 for additional detail. A summary of the inputs used in the initial measurement of the convertible note warrant and conversion option derivative liabilities is as follows:
| | | | | | | | | | | |
| August 9, 2022 |
| (Initial Measurement) |
| Convertible Note Warrant Derivative Liability | | Conversion Option Derivative Liability |
| Unit price | $ | 6.63 | | | $ | 6.63 | |
| Term (in years) | 5.00 | | | 5.00 | |
| Volatility | 42.5 | % | | 42.5 | % |
| Risk-free rate | 3.0 | % | | 3.0 | % |
| Dividend yield | 0.0 | % | | 0.0 | % |
| Cost of equity | 0.0 | % | | 0.0 | % |
There were no transfers between fair value measurement levels during the three and nine months ended September 30, 2022 and 2021.
Uncertainty of Fair Value Measurement from Use of Significant Unobservable Inputs
The inputs to estimate the fair value of the Company’s derivative warrant, earnout, convertible note warrant, and conversion option derivative liabilities were the market price of the Company’s common stock, their remaining expected term, the volatility of the Company’s common stock price and the risk-free interest rate over the expected term. Significant changes in any of those inputs in isolation can result in a significant change in the fair value measurement.
Generally, an increase in the market price of the Company’s shares of common stock, an increase in the volatility of the Company’s shares of common stock, and an increase in the remaining term of the derivative liabilities would each result in a directionally similar change in the estimated fair value of the Company’s derivative liabilities. Such changes would increase the associated liability while decreases in these assumptions would decrease the associated liability. An increase in the risk-free interest rate would result in a decrease in the estimated fair value measurement and thus a decrease in the associated liability. The Company has not, and does not plan to, declare dividends on its common stock and, as such, there is no change in the estimated fair value of the derivative warrant liabilities due to the dividend assumption.
Note 8. Property and Equipment, Net
The Company accounts for property and equipment at historical cost less accumulated depreciation. See Note 2 for a summary of the Company’s policies relating to property and equipment.
Property and equipment, net, consist of the following:
| | | | | | | | | | | | | | | | | |
| (in thousands) | Useful lives | | September 30, 2022 | | December 31, 2021 |
| Computers and software | 60 months | | $ | 1,455 | | | $ | 961 | |
| Office furniture | 84 months | | 590 | | | 343 | |
| Leasehold improvements | Shorter of lease term or estimated useful life | | 6,017 | | | 3,387 | |
| Medical equipment | 60 months | | 1,086 | | | 805 | |
| Construction in progress | | | 533 | | | 518 | |
| Finance lease ROU assets | Shorter of lease term or estimated useful life | | 371 | | | 162 | |
| Less: accumulated depreciation | | | (3,046) | | | (1,984) | |
| Total property and equipment, net | | | $ | 7,006 | | | $ | 4,192 | |
Depreciation expense for the three months ended September 30, 2022 and 2021 was $393 and $225, respectively. Depreciation expense for the nine months ended September 30, 2022 and 2021 was $1,066 and $563, respectively.
Note 9. Accrued Expenses and Other Current and Non-Current Liabilities
Accrued expenses and other current liabilities as of September 30, 2022 and December 31, 2021 consist of the following:
| | | | | | | | | | | |
| (in thousands) | September 30, 2022 | | December 31, 2021 |
| Compensation, including bonuses, fringe benefits, and payroll taxes | $ | 4,614 | | | $ | 3,325 | |
| Contract liabilities | 1,278 | | | 262 | |
| Directors and officers insurance premiums | 4,280 | | | 5,009 | |
| Deferred acquisition and contingent consideration (see Note 16) | 2,347 | | | 2,359 | |
| Accrued interest | 648 | | | — | |
| Other liabilities | 2,980 | | | 2,969 | |
| Total accrued expenses and other current liabilities | $ | 16,147 | | | $ | 13,924 | |
Contract liabilities as of September 30, 2022 and December 31, 2021 consist of cumulative adjustments made to capitated revenue recognized in prior periods.
Pursuant to the Business Combination, the Company has agreed to indemnify members of the Board and certain officers if they are named or threatened to be named as a party to any proceeding by reason of the fact that they acted in such capacity. The Company entered into a financing arrangement to pay premiums for directors’ and officers’ (“D&O”) insurance coverage to protect against such losses on November 12, 2021. As of September 30, 2022, the remaining D&O principal balance was $4,280, all of which is due to be paid before September 30, 2023 and classified as a current liability.
Note 10. Leases
The Company leases clinics, office buildings, and certain equipment under noncancellable financing and operating lease agreements that expire at various dates through November 2031. See Note 2 for a summary of the Company’s policies relating to leases.
The initial terms of operating leases range from 0 to 10 years and certain leases provide for free rent periods, periodic rent increases, and renewal options. Monthly payments for these leases range from $0 to $37. All lease agreements generally require the Company to pay maintenance, repairs, property taxes, and insurance costs, which are generally variable amounts based on actual costs incurred during each applicable period.
Lease Expense
The components of lease expense were as follows for the three and nine months ended September 30, 2022:
| | | | | | | | | | | |
| (in thousands) | Three Months Ended September 30, 2022 | | Nine Months Ended September 30, 2022 |
| | | |
| Operating lease costs: | $ | 1,576 | | | $ | 3,992 | |
| Finance lease costs: | | | |
| Amortization of ROU asset | $ | 14 | | | $ | 41 | |
| Interest expense | $ | 1 | | | $ | 4 | |
| Other lease costs: | | | |
| Short-term lease costs | $ | 94 | | | $ | 306 | |
| Variable lease costs | $ | 263 | | | $ | 690 | |
Operating and other lease costs are presented as part of selling, general, and administrative expenses. The components of finance lease costs appear in depreciation and amortization and interest expense.
Maturity of Lease Liabilities
The aggregate future lease payments for the Company's leases in years subsequent to September 30, 2022 are as follows:
| | | | | | | | |
| (in thousands) | Operating Leases | Finance Leases |
| 2022 | $ | 1,511 | | $ | 24 | |
| | | | | | | | |
| (in thousands) | Operating Leases | Finance Leases |
| 2023 | 6,443 | | 84 | |
| 2024 | 5,946 | | 77 | |
| 2025 | 5,264 | | 42 | |
| 2026 | 4,613 | | 39 | |
| Thereafter | 7,618 | | 29 | |
| Total future lease payment | $ | 31,395 | | $ | 295 | |
| Less: amount representing interest | (4,404) | | (34) | |
| Present value of future lease payment (lease liability) | $ | 26,991 | | $ | 261 | |
| Reported as: | | |
| Lease liabilities, current | $ | 5,163 | | $ | 74 | |
| Lease liabilities, noncurrent | 21,828 | | 187 | |
| Total lease liabilities | $ | 26,991 | | $ | 261 | |
Lease Term and Discount Rate
The following table provides the weighted average remaining lease terms and weighted average discount rates for the Company's leases as of September 30, 2022:
| | | | | |
| September 30, 2022 |
| Weighted-average remaining lease term (in years) | |
| Operating | 5.37 |
| Finance | 3.92 |
| Weighted-average discount rate | |
| Operating | 5.15 | % |
| Finance | 5.95 | % |
Supplemental Cash Flow Information
The following table provides certain cash flow and supplemental noncash information related to the Company's lease liabilities for the three and nine months ended September 30, 2022.
| | | | | |
| (in thousands) | Nine Months Ended September 30, 2022 |
| Supplemental cash flow information | |
| Cash paid for amounts included in the measurement of lease liabilities: | |
| Operating cash payment from operating leases | $ | 3,814 | |
| Financing cash payments for finance leases | 49 | |
| Lease liabilities arising from obtaining right-of-use assets: | |
| Operating leases | $ | 29,468 | |
| Finance leases | 203 | |
Lease Modifications
During the three months ended September 30, 2022, the Company expanded its lease space and extended its lease term for two corporate offices in California, both with revised end dates of January 1, 2028. These expansions and extensions constitute lease modifications that qualify as a change of accounting for the original leases and not separate contracts. Accordingly, in the three months ended September 30, 2022, the Company recognized the difference of $880 as an increase to the operating lease liability; $839 net of lease incentives, as an increase to operating lease right-of-use asset, and $42 as an increase to rent expense.
During the nine months ended September 30, 2022, the Company expanded its lease space and extended its lease term for two clinics and two corporate offices in California. These expansions and extensions constitute lease modifications that qualify as a change of accounting for the original leases and not separate contracts. Accordingly, in the nine months ended September
30, 2022, the Company recognized the difference of $2,186 as an increase to the operating lease liability; $2,052, net of lease incentives, as an increase to operating lease right-of-use asset, and $39 as a net increase to rent expense.
Note 11. Debt
Senior Secured Convertible Note
On August 9, 2022, TOI entered into a Facility Agreement (the “Facility Agreement”) with certain lenders (“Lenders”) and Deerfield Partners L.P. (“Agent”), pursuant to which, TOI borrowed cash loans from the Lenders in the amount of $110,000, in exchange for which, TOI issued to each Lender a secured convertible promissory note (“Senior Secured Convertible Note”), which is payable to such Lenders in an amount equal to the unpaid principal amount of loans held by such Lender.
The Senior Secured Convertible Note will mature on August 9, 2027 (the “Maturity Date”) and shall bear interest at the rate of 4.00% per annum from August 9, 2022, on the outstanding principal amount, any overdue interest and any other amounts and obligations. The interest shall be paid in cash quarterly in arrears commencing on October 1, 2022. In case of any prepayment, repayment or redemption of the Senior Secured Convertible Note, the Company shall pay any accrued and unpaid interest on the principal, along with a make whole amount and an exit fee.
The Facility Agreement requires the Company to meet certain operational and reporting requirements, including, but not limited to, customary regulatory, financial reporting, and disclosure requirements. Additionally, limitations are placed on the Company's ability to merge with other companies and enter into other debt arrangements and permitted investments are limited to amounts specified in the Facility Agreement. The Facility Agreement also provides certain restrictions on dividend payments and other equity transactions and requires the Company to make prepayments under specified circumstances. Financial covenants in the Facility Agreement require the Company to maintain a minimum unrestricted cash and cash equivalent balance of $40,000 and a minimum net quarterly revenues of $50,000 during fiscal year 2023; $75,000 during fiscal year 2024; and $100,000 during fiscal year 2025. Additionally, the Registration Rights Agreement requires the Company to have an effective registration statement and calls for payment should the registration statement cease to remain effective. The Company was in compliance with the covenants of the Facility Agreement as of September 30, 2022.
Conversion Options
The Senior Secured Convertible Note contains several embedded conversion options (the “Conversion Options”) that grant the holders of the Senior Secured Convertible Note the ability to convert the Senior Secured Convertible Note at any time on or after date of issuance of the note. The Conversion Options are convertible into shares of the Company’s common stock (such converted shares, “Conversion Shares”) and, in certain circumstances, a combination of cash and shares of the Company’s common stock, or a combination of cash, other assets and securities or other property of any Company successor entity. The Conversion Shares or settlement amounts shall be computed on the basis of predefined formulae, with a set conversion price of $8.567 as one of the inputs and a conversion cap of 14,663,019 shares. The if-converted value did not exceed the principal amount as of September 30, 2022. No Conversion Shares were issued as of September 30, 2022 and December 31, 2021.
The Company evaluated the Conversion Options of the Senior Secured Convertible Note under ASC 815 and concluded that they require bifurcation from the host contract as a separate unit of account. The Conversion Options do not meet the criteria to be classified in shareholders’ equity and hence, are accounted for as a derivative liability remeasured at fair value at each balance sheet date with changes in fair value reported in earnings.
The Conversion Options contain certain limits on exercise if, after giving effect to the exercise, the Lender would beneficially own a number of shares of common stock of the Company in excess of those permissible under the terms of the Senior Secured Convertible Note. The number of shares to be issued against these notes and conversion price are each subject to adjustments provided under the terms of Senior Secured Convertible Note.
The holder shall receive dividends on the Senior Secured Convertible Note and distributions of any kind made to the holders of common stock, other than dividends of, or distributions in, shares, to the same extent as if the holder had converted the Senior Secured Convertible Note into such shares and had held such shares on the record date for such dividends and distributions any limitations on conversion options.
Optional Redemption
The Facility Agreement also provides the Company the right to redeem the outstanding principal amount of each note (“Optional Redemption”) for the Optional Redemption Price. The Company shall not affect any Optional Redemption under this Senior Secured Convertible Note unless along with this, the Company effects an optional redemption under all other notes
in accordance with the terms thereof, on a pro rata basis, based upon the respective applicable original principal amount of each of the notes outstanding as of the date the notice for Optional Redemption is delivered to the holders.
The Company evaluated the Optional Redemption feature of the Senior Secured Convertible Note under ASC 815 and concluded that it requires bifurcation from the host contract as a separate unit of account. The Optional Redemption feature does not meet the criteria to be classified in shareholders’ equity and hence, is accounted for as a derivative liability remeasured at fair value at each balance sheet date with changes in fair value reported in earnings. The fair value of the Optional Redemption feature is de minimis.
If the principal redemption amount specified in an Optional Redemption notice is less than the entire principal amount then outstanding, the principal amount specified in each conversion notice shall be applied (i) first, to reduce, on a dollar-for-dollar basis, the principal amount of the note in excess of the principal redemption amount until such excess principal amount is reduced to zero and (ii) to reduce, on a dollar-for-dollar basis, the principal redemption amount until all of such principal redemption amount shall have been converted.
Convertible Note Warrants
The Facility Agreement also provides for the issuance of warrants (the “Convertible Note Warrants”) on each date any principal amount of any Senior Secured Convertible Note is paid, repaid, redeemed, or prepaid at any time prior to the Maturity Date. Convertible Note Warrants are exercisable from their original issue date to August 9, 2027, for purchase of an aggregate amount of Conversion Shares into which such principal amount of Senior Secured Convertible Note was convertible into, immediately prior to such payment, at an exercise price of $8.567. The holder of Convertible Note Warrants may pay the exercise price in cash or exercise the warrant on cashless basis or through a reduction of an amount of principal outstanding under any Senior Secured Convertible Note held by such holder. In the event that the Convertible Note Warrant has not been exercised in full as of the last business day during its term, the holder shall be deemed to have exercised the purchase rights represented by the Convertible Note Warrant in full as a cashless exercise, in which event the Company shall issue number of shares to the holder computed on the basis of a predefined formula.
The Company evaluated the Convertible Note Warrants of the Senior Secured Convertible Note under ASC 815 and concluded that they require bifurcation from the host contract as a separate unit of account. The Convertible Note Warrants do not meet the criteria to be classified in shareholders’ equity and hence, are accounted for as a derivative liability remeasured at fair value at each balance sheet date with changes in fair value reported in earnings.
The Convertible Note Warrant holder shall be entitled to receive any dividend or distribution made by the Company to the holders of common stock to the same extent as if the holder had exercised the Convertible Note Warrants in full in a cash exercise.
The number of shares to be issued against these warrants and exercise price are each subject to adjustments provided under the terms of Convertible Note Warrants. The Convertible Note Warrants contain certain limits on exercise if, after giving effect to the exercise, the Lender would beneficially own a number of shares of common stock of the Company in excess of those permissible under the terms of the Convertible Note Warrants. Further, the Convertible Note Warrants can be fully or partially settled in cash in certain cases in accordance with the terms of issuance such as when shares issuable upon exercise of the warrants exceed a predefined number, upon occurrence of predefined event of default and upon occurrence of predefined events that will bring a fundamental change in the Company such as merger, consolidation, business combination, recapitalization, reorganization, reclassification or other similar event.
As of September 30, 2022, there are no Convertible Note Warrants outstanding.
Allocation of Proceeds
The Company has allocated total issuance proceeds of $110,000 among the Senior Secured Convertible Note and Convertible Note Warrants based on fair value. Upon issuance of the Convertible Note Warrants, the Company recorded Convertible Note Warrants, Optional Redemption, and Conversion Options of $0, $0 and $28,160, which were recorded as a debt discount to the Senior Secured Convertible Note of $110,000. The Company will amortize the debt discount over a period of 5 years (of which 4.86 years remain).
The total issuance costs of $4,924 was allocated among the Senior Secured Convertible Note, Convertible Note Warrants, Optional Redemption, and Conversion Options, by allocating costs of $0, $0, and $1,261 to the Convertible Note Warrants, Optional Redemption, and Conversion Options with the residual cost of $3,663 being allocated to the Senior Secured Convertible Note (in addition to the debt discount). The Company expensed issuance costs allocated to Warrants, Optional
Redemption, and Conversion Options at inception and will amortize the costs allocated to the Senior Secured Convertible Note over a period of 5 years (of which 4.86 years remain).
Amounts Outstanding and Recognized during the Periods Presented
The Senior Secured Convertible Note as of September 30, 2022 and December 31, 2021 consists of the following:
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
| Senior Secured Convertible Note, due August 9, 2027 | $ | 110,000 | | | $ | — | |
| | | |
| Less: Unamortized debt issuance costs | 3,588 | | | — |
| Less: Unamortized debt discount | 27,343 | | | — |
| Long-term debt, net of unamortized debt discount and issuance costs | $ | 79,069 | | | $ | — | |
The amortization of the debt issuance costs was charged to interest expense for all periods presented. For the three and nine months ended September 30, 2022 and 2021 the effective yield was 13.38%, and 0%, respectively. The amount of debt issuance costs included in interest expense for the three and nine months ended September 30, 2022 was $892. The Company accrued interest of $648 on the Credit Agreement term loan for the three and nine months ended September 30, 2022. There was no debt issuance cost, accrued interest, or interest expense related to this facility for the three and nine months ended September 30, 2021.
On August 9, 2022, the Company also entered into the Guarantee and Security Agreement (“Guarantee Agreement”) with the Agent for the purpose of providing a guarantee of all the obligations under the Facility Agreement (refer to Note 15. Commitments and Contingencies for detail).
PPP Loan
The Company recorded a PPP loan as a result of the acquisition of the practice of Leo E. Orr, MD on November 12, 2021 with Pacific Western Bank in the amount of $183, with interest bearing at 1%. The maturity date of the loan is October 24, 2026. The application for the PPP funds required an entity to, in good faith, certify that the current economic uncertainty made the loan request necessary to support the ongoing operations of the entity. This certification further required the entity to take into account its current business activity and its ability to access other sources of liquidity sufficient to support ongoing operations in a manner that is not significantly detrimental to the business. The receipt of these funds, and the forgiveness of the loan attendant to these funds, is dependent on the entity having initially qualified for the loan and qualifying for the forgiveness of such loan based on its future adherence to the forgiveness criteria. During the nine months ended September 30, 2022, the Company received notice of forgiveness of its PPP loan and accordingly has recognized the loan principal balance and accrued interest as a gain on debt extinguishment in the Condensed Consolidated Statement of Income (Operations).
Note 12. Income Taxes
The Company recorded income tax benefit of $24 for the three months ended September 30, 2022, and income tax expense of $124 for the nine months ended September 30, 2022, as compared to income tax expense of $799 for the three months ended September 30, 2021, and income tax expense of $1,797 for the nine months ended September 30, 2021. The decrease of $823 and $1,673, respectively, in income tax expense is primarily related to the corresponding increase in the valuation allowance for TOI. The Company's effective tax rate decreased to 1.10% for the nine months ended September 30, 2022, from 175.15% for the nine months ended September 30, 2021, primarily due to the increase of the valuation allowance.
The Company's effective tax rate for the nine months ended September 30, 2022, was different than the U.S. federal statutory tax rate of 21.00%, primarily due to the increased valuation allowance, partially offset by the tax effect of the change in fair market value of the warrant, earn out, and derivative liabilities, non-deductible transaction costs, as well as the Section 162(m) limitation on compensation for covered employees and Section 163(l) limitation on interest expense related to the convertible note, which are not taxable for federal income tax purposes.
Note 13. Stockholders' Equity
The Condensed Consolidated Statements of Preferred Shares and Changes in Stockholders’ Equity (Deficit) has been retroactively adjusted for all periods presented to reflect the Business Combination and reverse recapitalization described in Note 1. The balances as of September 30, 2021 from the condensed consolidated financial statements of Legacy TOI as of that
date, share activity (Legacy TOI preferred stock, Legacy TOI common stock, and additional paid-in capital) and per share amounts were retroactively adjusted, where applicable, using the Common Stock Exchange Ratio.
Common Stock
Upon the Closing Date of the Business Combination on November 12, 2021, pursuant to the terms of the Amended and Restated Certificate of Incorporation, the Company authorized 500,000,000 shares of common stock with a par value of $0.0001. As of September 30, 2022 and December 31, 2021, there were 72,341,687 and 73,249,042 shares, respectively, of common stock outstanding.
In connection with the Closing Date, all previously issued and outstanding shares of Legacy TOI preferred stock were converted into Legacy TOI common stock and received i) shares of Company common stock pursuant to a 591:1 ratio of Company common shares to Legacy TOI common shares (the "Common Stock Exchange Ratio") and ii) cash. The Company has retroactively adjusted shares issued and outstanding prior to November 11, 2021 to give effect to the Common Stock Exchange Ratio to determine the number of shares of common stock into which they were converted.
Voting
The holders of the Company’s common stock are entitled to one vote for each share of common stock held at all meetings of stockholders (and written actions in lieu of meetings), and there is no cumulative voting.
Dividends
Common stockholders are entitled to receive dividends whenever funds are legally available and when declared by the board of directors. No dividends have been declared as of September 30, 2022.
Preferred Stock
Upon the Closing Date of the Business Combination, pursuant to the terms of the Amended and Restated Certificate of Incorporation, the Company authorized 10,000,000 shares of Series A Common Equivalent Preferred Stock (“preferred stock”) with a par value and liquidation preference of $0.0001 per share. The Company’s board of directors has the authority, without further action by the stockholders to issue such shares of preferred stock in one or more series, to establish, from time to time the number of shares to be included in each such series, and to fix the dividend, voting, and other rights, preferences, and privileges of the shares. Immediately following the Closing Date and as of December 31, 2021, there were 163,510 shares of preferred stock outstanding. As of September 30, 2022, there were 165,045 shares of preferred stock outstanding.
Conversion
Each share of preferred stock is convertible, at any time on the part of the holder except with respect to the Beneficial Ownership Limitation (defined below), into 100 shares of common stock.
Blocker/Beneficial Ownership Limitation
The preferred stock is subject to a beneficial ownership limitation such that the preferred stock may not, at any time, be convertible into more than 4.9% of the total number of shares of common stock outstanding (“Beneficial Ownership Limitation”).
Voting
The holders of preferred stock do not have voting rights in the Company.
Dividends
The holders of preferred stock are entitled to receive dividends whenever funds are legally available and when declared by the board of directors on an as-converted basis. No dividends have been declared as of September 30, 2022.
Assumed Public Warrants and Private Placement Warrants
Following the consummation of the Business Combination, holders of the public warrants and private placement warrants are entitled to acquire common stock of the Company. The warrants became exercisable 30 days from the completion of the Business Combination, on December 12, 2021, and will expire five years after the completion of the Business Combination or
earlier upon redemption or liquidation. As of September 30, 2022, there are 5,749,986 public warrants outstanding and 3,177,542 private placement warrants outstanding.
Each warrant entitles the holder to purchase one share of common stock for $11.50 per share. Private warrants held by the initial purchaser or certain permitted transferees may be exercised on a cashless basis.
If the reported last sale price of the common stock equals or exceeds $18.00 per share for any 20 trading days within a 30-trading day period ending three business days before the Company sends the notice of redemption to the warrant holders, the Company may redeem all the public warrants at a price of $0.01 per warrant upon not less than 30 days’ prior written notice.
If the Company calls the public warrants for redemption, management will have the option to require all holders that wish to exercise the public warrants to do so on a cashless basis. The Company will not be required to net cash settle the warrants.
The private warrants are exercisable on a cashless basis and are non-redeemable so long as they are held by the initial purchasers or their permitted transferees. If the private warrants are held by someone other than the initial purchasers of their permitted transferees, the private warrants will be redeemable by the Company and exercisable by such holders on the same basis as the public warrants.
Share Repurchase Program
On May 10, 2022, the Company's Board consented to the adoption and approval of the Share Repurchase Program, authorizing up to $20,000 to be spent on the repurchase of the Company's common stock, expiring on December 31, 2022. The Company repurchased and immediately retired 1,500,000 shares of its common stock for $9,000 from a related party (see Note 21) during the nine months ended September 30, 2022. At September 30, 2022, $11,000 of the Share Repurchase Program authorization remained available for repurchases.
Note 14. Share-Based Compensation
Non-Qualified Stock Option Plan
On January 2, 2019, the Company issued and adopted the 2019 Non-Qualified Stock Option Plan (the “2019 Plan”) to incentivize directors, consultants, advisors, and other key employees of the Company and its subsidiaries to continue their association by providing opportunities to participate in the ownership and further growth of the Company. The 2019 Plan provides for the grant of options (the “Stock Options”) to acquire common shares of the Company.
Stock Options are exercised from the pool of shares designated by the appropriate Committee of the Board of Directors. The grant-date fair value of each option award is estimated on the date of grant using the Black-Scholes-Merton option-pricing model. The grant date fair value of the service vesting and the performance vesting options is recognized as an expense over the requisite service period and upon the achievement of the performance condition deemed probable of being achieved, respectively. The exercise price of each Stock Option shall be determined by the Committee and may not be less than the fair market value of the common shares on the date of grant. Stock Options have 10-year terms, after which they expire and are no longer exercisable.
The total number of common shares for which Stock Options may be granted under the 2019 Plan shall not exceed 13,640. The 2019 Plan was amended on November 6, 2020, pursuant to which the total number of common shares for which Stock Options may be granted under the 2019 Plan shall not exceed 15,640.
Stock Options become vested upon fulfillment of either service vesting conditions, performance vesting conditions, or both, as determined by the award agreement entered into by the Company and optionee. The service vesting requirement states that: (i) 25% of the service vesting options shall vest on the first anniversary of the grant date and (ii) the remaining 75% shall vest on an equal monthly-basis, so long as the optionee has remained continuously employed by the Company from the date of the award through the fourth anniversary of the grant date. The performance vesting requirement states that Stock Options shall vest upon sale of the Company only if the optionee has been continuously employed by the Company or its subsidiaries from the grant date through the date of such sale of the Company. For the awards vesting based on service conditions only and that have a graded vesting schedule, the Company recognizes compensation expense for vested awards in earnings, net of actual forfeitures in the period they occur, on a straight-line basis over the requisite service period.
Conversion of the Stock Options
In conjunction with the Business Combination, the Company amended and fully restated the 2019 Plan through the establishment of the 2021 Incentive Plan (“2021 Plan”). Pursuant to the 2021 Plan, each remaining legacy Stock Option from
the 2019 Plan that was outstanding immediately prior to the Business Combination, whether vested or unvested, was converted into an option to purchase a number of shares of common stock (each such option, an “Exchanged Option”) equal to the product (rounded down to the nearest whole number) of (i) the number of shares of Legacy TOI stockholders subject to such Stock Option immediately prior to the Business Combination, and (ii) an exercise price per share equal to (A) the exercise price per share of such Stock Option immediately prior to the consummation of the Business Combination, divided by (B) the Common Stock Exchange Ratio ("Stock Option Exchange Ratio"). Following the Business Combination, each Exchanged Option that was previously subject to time vesting only, will continue to be governed by the same terms and conditions (including vesting and exercisability terms) as were applicable to the corresponding former old Stock Option immediately prior to the consummation of the Business Combination. Each Exchanged Option that was previously subject to performance vesting, will no longer be subject to the sale of the Company, and was modified to include service requirements only, under which, the Exchange Options will vest on a monthly-basis, so long as the optionee has remained continuously employed by the Company from the date of the Business Combination through the third anniversary of the Closing Date. The Company treated the Exchanged Options that were previously subject to performance conditions as a new award granted at the Closing Date. The Exchanged Options that were previously subject to service vesting only were not modified as a result of the Business Combination. All stock option activity was retroactively restated to reflect the Exchanged Options.
As of the Closing Date, the 11,850 Stock Options outstanding under the 2019 Plan were converted into 6,925,219 Exchanged Options after effect of the Common Stock Exchange Ratio. This effect of the Common Stock Exchange Ratio has been retroactively adjusted throughout the Company's condensed consolidated financial statements.
As of September 30, 2022, the total number of shares of common stock remaining available for future awards (e.g., non-qualified stock options, incentive stock options, restricted stock units, restricted stock awards) under the 2021 Plan is 10,715,648.
The weighted average assumptions used in the Black-Scholes-Merton option-pricing model for the units granted during the nine months ended September 30, 2022 and 2021 Stock Options are provided in the following table:
| | | | | | | | | | | |
| September 30, 2022 | | September 30, 2021 |
| Valuation assumptions: | | | |
| Expected dividend yield | —% | | —% |
| Expected volatility | 35.0% to 45.0% | | 38.60% to 40.20% |
| Risk-free interest rate | 2.33% to 2.99% | | 0.76% to 1.12% |
| Expected term (years) | 6.07 to 6.65 | | 7.00 |
The Company used the simplified method to calculate the expected term of stock option grants because sufficient historical exercise data was not available to provide a reasonable basis for the expected term. Under the simplified method, the expected term is estimated to be the mid-point between the vesting date and the contractual term of the option.
Stock option activity during the nine months ended September 30, 2022 and 2021 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Stock options | | Number of shares | | Weighted average exercise price | | Weighted average remaining contractual term | | Aggregate intrinsic value (in thousands) |
| Balance at January 1, 2022 | | 6,921,180 | | | $ | 0.89 | | | | | |
| Granted | | 1,563,633 | | | 7.14 | | | | | |
Exercised | | (460,385) | | | 0.91 | | | | | |
| Forfeited | | (833,687) | | | 2.17 | | | | | |
| Expired | | (1,876) | | | 1.13 | | | | |
Balance at September 30, 2022 | | 7,188,865 | | | $ | 2.10 | | | 7.51 | | $ | 21,744 | |
Vested Options Exercisable at September 30, 2022 | | 2,762,097 | | | $ | 0.87 | | | 6.74 | | $ | 10,391 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Stock options | | Number of shares | | Weighted average exercise price | | Weighted average remaining contractual term | | Aggregate intrinsic value (in thousands) |
| Balance at January 1, 2021 | | 8,683,952 | | $ | 0.85 | | | | | |
| Granted | | 1,182,218 | | | 1.08 | | | | | |
| Exercised | | — | | | — | | | | | |
| Forfeited | | (710,032) | | | 0.86 | | | | | |
| Expired | | — | | | — | | | | | |
Balance at September 30, 2021 | | 9,156,138 | | | $ | 0.88 | | | 8.31 | | $ | — | |
Vested Options Exercisable at September 30, 2021 | | 1,506,554 | | | $ | 0.85 | | | 6.86 | | $ | — | |
Total share-based compensation expense during the three months ended September 30, 2022 and 2021 was $2,756 and $60, related to the Stock Options, respectively. Total share-based compensation expense during the nine months ended September 30, 2022 and 2021 was $8,837 and $153, related to the Stock Options, respectively.
At September 30, 2022, there was $23,747 of total unrecognized compensation cost related to unvested service Stock Options that are expected to vest. That cost is expected to be recognized over a weighted average period of 2.48 years. The total fair value of common shares vested during the nine months ended September 30, 2022 and 2021 was $6,976 and $322, respectively.
Restricted Stock Awards (“RSAs”) and Restricted Stock Units (“RSUs”)
Agajanian Holdings (“Holdings”), a holder of Series A Preferred Shares of Legacy TOI, entered into arrangements with physicians employed by the TOI PCs to issue RSAs which represent Series A Preferred Shares of Legacy TOI. The Legacy TOI RSAs only have performance vesting requirements linked to the sale of the Company so long as the grantee remains continuously and actively employed by the Company’s subsidiaries through the vesting date.
Conversion of the RSAs
Each of the Legacy TOI RSAs, from the Plan that was outstanding immediately prior to the Business Combination, whether vested or unvested, was converted into an RSU equal to the product (rounded down to the nearest whole number) of (i) the number of shares of RSAs immediately prior to the Business Combination, (ii) conversion rate of 1:10 of the Series A Preferred Shares of Legacy TOI, and (iii) the Common Stock Exchange Ratio. Following the Business Combination, each RSU is no longer subject to the sale of the Company event in order to vest, but was modified to include service requirements only. The service vesting requirement states that: (i) 16.67% of the RSUs shall vest on the sixth month anniversary of the Closing Date, and (ii) the remaining 83.33% shall vest on an equal quarterly-basis, so long as the grantee has remained continuously employed by the Company from the date of the award through the third anniversary of the grant date. The Company treated the RSUs that were previously subject to performance conditions as a new award granted at the Closing Date. All RSAs activity was retroactively restated to reflect the RSUs.
As of the Closing Date, the 2,210 RSAs outstanding under the Plan were converted into 1,291,492 RSUs upon the completion of the Business Combination after effect of the Common Stock Exchange Ratio. This effect of the Common Stock Exchange Ratio has been retroactively adjusted throughout our condensed consolidated financial statements.
The weighted-average grant date fair values of the RSUs granted during three and nine months ended September 30, 2022 and as of Closing Date were determined to be $6.82, $7.28 and $10.98, respectively, based on the fair value of the Company’s common share at the grant date.
A summary of the activity for the RSUs and RSAs for the nine months ended September 30, 2022 and 2021, respectively, are shown in the following tables:
| | | | | |
| Number of Shares |
| Balance at January 1, 2022 | 1,291,492 | |
| Granted | 1,544,284 | |
| Vested | (350,043) | |
| Forfeited | (315,686) | |
Balance at September 30, 2022 | 2,170,047 | |
| | | | | |
| Number of Shares |
| Balance at January 1, 2021 | 1,390,839 | |
| Granted | — | |
| Vested | — | |
| Forfeited | (23,376) | |
Balance at September 30, 2021 | 1,367,463 | |
The total share-based compensation expense during the three and nine months ended September 30, 2022 was $2,356 and $5,848 related to the RSUs, respectively. The sale of the Company was not considered probable until consummation of the transaction, and therefore, during the three and nine months ended September 30, 2021 and prior to the Business Combination, no compensation costs were recognized related to the RSAs.
As of September 30, 2022 there was $16,573 of unrecognized compensation expense related to the RSUs that are expected to vest. That cost is expected to be recognized over a weighted average period of 2.57 years as of September 30, 2022. As of September 30, 2022, 350,043 of the RSUs have vested and 64,331 were net settled to cover the required withholding tax upon vesting.
2020 Sale Bonus Plan
Starting December 2020, the Company issued bonus awards under the 2020 Sale Bonus Plan (the “Bonus Plan”) along with the Stock Options with performance vesting conditions to certain physicians of the Practice. The Stock Options and the bonus awards under the Bonus Plan vest upon the sale of the Company. The bonus award the optionee was eligible for was equal to the exercise price of the Stock Option, and was intended to incentivize the physicians to remain employed with the Practice.
The Company accounted for the bonus awards in accordance with ASC Topic No. 710, Compensation — General (“ASC 710”). The sale of the Company was not considered probable until consummation of the transaction, and therefore, for the nine months ended September 30, 2021, no liability associated with the bonus awards was recognized by the Company.
In conjunction with the Business Combination, the Company settled the 2020 Sale Bonus Plan obligation in cash at the Closing Date, in the amount of $635.
Earnout Shares granted to Employees
As part of the Business Combination, DFPH issued to eligible Legacy TOI stockholders and Legacy TOI employees the contingent right to receive up to $12.5 million additional shares of common stock (“Legacy TOI Earnout Shares”), in two tranches of $5.0 million ("First Earnout Tranche") and $7.5 million ("Second Earnout Tranche"), respectively, upon the Company common stock achieving a price per share of $12.50 during the two-year period following the Closing or a price per share of $15.00 during the three-year period following the Closing Date, in each case, as its last reported sales price per share for any 20 trading days within any 30 consecutive trading day period within the applicable period ("Earnout Terms"); provided, that (i) if one or both of the share price triggers has not been achieved prior to the end of the three-year period following the Closing Date, (ii) the Company enters into a definitive agreement that would result in a change of control and (iii) the price per share of the Company’s common stock in such transaction is equal to or greater than one or both of the share price triggers, then at the Closing Date of such transaction, the Company shall issue the applicable portion of the Legacy TOI Earnout Shares as if such share price trigger had been achieved.
In addition, certain DFPH common stockholders deposited 575,000 shares of DFPH common stock in an escrow account that will vest and be released to such holders in two tranches of 50%, each (“DFPH Earnout Shares”), upon the Company
common stock achieving the Earnout Terms as described above; provided, that (i) if one or both of the share price triggers has not been achieved prior to the end of the three-year period following the closing, (ii) the Company enters into a definitive agreement that would result in a change of control and (iii) the price per share of common stock in such transaction is equal to or greater than one or both of the share price triggers, then at the closing of such transaction, the Company shall issue the applicable portion of the DFPH Earnout Shares as if such share price trigger had been achieved. To the extent any DFPH Earnout Shares remain unvested at the expiration of the three-year period following the closing, such DFPH Earnout Shares shall be forfeited and cancelled without any consideration.
Collectively, the Legacy TOI Earnout Shares and DFPH Earnout Shares constitute the “Earnout Shares”, the “Earnout”, and the “Earnout Liability”.
The Company issued Legacy TOI Earnout Shares to Legacy TOI option holders and Legacy RSU holders (“Option-holders Earnout” and “RSU-holders Earnout”, respectively, together “Employees Earnout Shares”).
The Option-holders Earnout vests upon the Company common stock achieving the price per share as provided above, so long as the optionee has remained continuously employed by the Company at that date. The RSU-holders Earnout vests upon (a) the Company common stock achieving the price per share as provided above, and (b) the underlying RSU vested, so long as the optionee has remained continuously employed by the Company at that date.
The grant date fair value of the First Earnout Tranche and Second Earnout Tranche as of Closing Date was determined to be $8.35 and $6.76, respectively. The assumptions used in the Monte-Carlo Simulation model for the Earnout Shares granted on the Closing Date are provided in the following table:
| | | | | |
| November 12, 2021 |
| Valuation assumptions | |
| Expected dividend yield | — | % |
| Expected volatility | 35.00 | % |
| Risk-free interest rate | 0.85 | % |
A summary of the activity for the Employees Earnout Shares for the nine months ended September 30, 2022 is shown in the following table:
| | | | | | |
| Number of Shares | |
| Balance at January 1, 2022 | $ | 1,602,435 | | |
| Granted | — | | |
| Forfeited | (165,297) | | |
Balance at September 30, 2022 | $ | 1,437,138 | | |
The total share-based compensation expense during the three and nine months ended September 30, 2022 was $1,434 and $6,928, related to the Employees Earnout Shares, respectively.
As of September 30, 2022, there was $1,536 of unrecognized compensation expense related to the Employees Earnout Shares, that are expected to vest. That cost is expected to be recognized over a weighted average period of 0.30 years as of September 30, 2022. As of September 30, 2022, none of the Employee Earnout Shares have vested.
Note 15. Commitments and Contingencies
The Company evaluates contingencies based upon available evidence. In addition, allowances for losses are provided each year for disputed items which have continuing significance. The Company believes that allowances for losses have been provided to the extent necessary, and that its assessment of contingencies is reasonable. Due to the inherent uncertainties and subjectivity involved in accounting for contingencies, there is at least a reasonable possibility that recorded estimates will change by a material amount in the near term. To the extent that the resolution of contingencies results in amounts which vary from management’s estimates, future operating results will be charged or credited. The principal commitments and contingencies are described below.
Legal Matters
The Company is subject to certain outside claims and litigation arising in the ordinary course of business. In the opinion of Management, the outcome of such matters will not have a material effect on the Company’s condensed consolidated financial statements. Loss contingencies entail uncertainty and a possibility of loss to an entity. If the loss is probable and the amount of loss can be reasonably estimated, the loss should be accrued according to Accounting Standards Codification No. 450-20, Disclosure of Certain Loss Contingencies. As of the end of December 31, 2021, the Company settled a loss contingency for a legal matter related to an employee lawsuit for $350.
Indemnities
The Company’s Articles of Incorporation and bylaws require it, among other things, to indemnify the director or officer against specified expenses and liabilities, such as attorneys’ fees, judgments, fines, and settlements, paid by the individual in connection with any action, suit, or proceeding arising out of the individual’s status or service as its director or officer, other than liabilities arising from willful misconduct or conduct that is knowingly fraudulent or deliberately dishonest, and to advance expenses incurred by the individual in connection with any proceeding against the individual with respect to which the individual may be entitled to indemnification by the Company. The Company also indemnifies its lessor in connection with its facility lease for certain claims arising from the use of the facilities. These indemnities do not provide for any limitation of the maximum potential future payments it could be obligated to make. Historically, the Company has not incurred any payments for these obligations and, therefore, no liabilities have been recorded for these indemnities in the accompanying condensed consolidated balance sheets.
The Health Insurance Portability and Accountability Act
The Health Insurance Portability and Accountability Act (“HIPAA”) assures health insurance portability, reduces healthcare fraud and abuse, guarantees security and privacy of health information, and enforces standards for health information. Organizations are required to be in compliance with HIPAA provisions. The Health Information Technology for Economic and Clinical Health Act (“HITECH”) imposes notification requirements in the event of certain security breaches relating to protected health information. Organizations are subject to significant fines and penalties if found not to be compliant with the provisions outlined in the regulations. The Company believes it is in compliance with these laws.
Regulatory Matters
Laws and regulations governing the Medicare program and healthcare generally, are complex and subject to interpretation. The Company believes that it is in compliance with all applicable laws and regulations and is not aware of any pending or threatened investigations involving allegations of potential wrongdoing. While no regulatory inquiries have been made, compliance with such laws and regulations can be subject to future government review and interpretation as well as significant regulatory action including fines, penalties, and exclusion from the Medicare and Medi-Cal programs.
Many of the Company’s payor and provider contracts are complex in nature and may be subject to differing interpretations regarding amounts due for the provision of medical services. Such differing interpretations may not come to light until a substantial period of time has passed following contract implementation. Liabilities for claims disputes are recorded when the loss is probable and can be estimated. Any adjustments to reserves are reflected in current operations. The Company does not have any reserves for regulatory matters as of September 30, 2022 and December 31, 2021.
Liability Insurance
The Company believes that its insurance coverage is appropriate based upon the Company’s claims experience and the nature and risks of the Company’s business. In addition to the known incidents that have resulted in the assertion of claims, the Company cannot be certain that its insurance coverage will be adequate to cover liabilities, arising out of claims asserted against the Company or the Company’s affiliated professional organizations, in the future where the outcomes of such claims are unfavorable.
The Company believes that the ultimate resolution of all pending claims, including liabilities in excess of the Company’s insurance coverage, will not have a material adverse effect on the Company’s financial position, results of operations or cash flows; however, there can be no assurance that future claims will not have such a material adverse effect on the Company’s business. Contracted physicians are required to obtain their own insurance coverage.
Guarantees
The Company, along with certain of the Company's subsidiaries from time to time party to the Facility Agreement (“Guarantors”), has pledged a first priority perfected lien on substantially all of their respective personal and real property, as collateral security for the payment of outstanding obligations, under the Facility Agreement.
Note 16. Business Combinations
During the year ended December 31, 2021, the Company merged with DFPH with the intent to raise capital and gain access to the public markets. Additionally, the Company closed on five business combinations and one asset acquisition, consistent with the intent to strategically grow its existing markets and expand into new markets. During the nine months ended September 30, 2022, the Company closed on three business combinations and one asset acquisition.
DFPH-Legacy TOI Merger
On June 28, 2021, DFPH, Orion Merger Sub I, Inc. ("First Merger Sub"), and Orion Merger Sub II, LLC ("Second Merger Sub") entered into an agreement and plan of merger ("Merger Agreement") with Legacy TOI to affect the Business Combination. In connection with the Business Combination, DFPH entered into subscription agreements with certain investors (the “PIPE Investors”), whereby it issued 17.5 million shares of common stock at $10.00 per share and 100,000 shares of preferred stock (collectively, the “PIPE Shares”) for an aggregate investment of $275,000 (“PIPE Investment”), which closed simultaneously with the consummation of the Business Combination.
On the Closing Date, (i) First Merger Sub merged with and into Legacy TOI, with Legacy TOI being the surviving corporation and (ii) immediately following, Legacy TOI merged with and into Second Merger Sub, with Second Merger Sub being the surviving entity and a wholly owned subsidiary of DFPH.
The total merger consideration on the Closing Date was $762,052, consisting of $595,468 in share consideration (consisting of 51.3 million shares of DFPH common stock issued to Legacy TOI at $10.00 per share as well as shares of DFPH common stock issuable in respect of restricted stock units and the exercise of Legacy TOI stock options), and $166,584 in cash. Gross proceeds from the transaction were $333,946. Of that, $167,510 was cash consideration to Legacy TOI equity holders. Legacy TOI also issued 12.5 million shares of common stock pursuant to the terms of an earnout (“Earnout Shares”). The earnout shares are allocable to both Legacy TOI stockholders and Legacy TOI option holders. In connection with the Business Combination, the Company incurred $39,914 of equity issuance costs, consisting of advisory, legal, deferred underwriting, share registration, and other professional fees, of which $6,769 was ascribed to the earnout liability and expensed with the remainder being netted against additional paid-in capital.
On the Closing Date, shares of DFPH common stock that were not otherwise redeemed as part of the DFPH public stockholder vote were automatically converted into shares of TOI common stock on a one-for-one basis. Further, PIPE Shares as well as DFPH common stock that was not otherwise forfeited or subject to earnout automatically converted into TOI common stock on a one-for-one basis. Additionally, holders of DFPH forfeited 555,791 Private Placement Warrants.
All periods prior to the Closing Date reflect the balances and activity of Legacy TOI. The consolidated balances as of December 31, 2020 from the audited consolidated financial statements of Legacy TOI as of that date, share activity (convertible redeemable preferred stock and common stock) and per share amounts in these Condensed Consolidated Statements of Convertible Preferred Shares and Changes in Stockholders' Equity (Deficit) were retroactively adjusted, where applicable, using the recapitalization exchange ratio of 591:1. All previously issued and outstanding shares of Legacy TOI preferred stock classified as mezzanine equity were converted into Legacy TOI common stock and was retroactively adjusted and reclassified to permanent equity as a result of the reverse recapitalization. As a result of the Business Combination, $142,557 of additional paid-in capital was recognized.
Practice Acquisitions
For the acquisition of various clinical practices, the Company applied the acquisition method of accounting, where the total purchase price was allocated, or preliminarily allocated, to the tangible and intangible assets acquired and liabilities assumed, based on their fair values as of the acquisition dates.
During the period ended September 30, 2022, the Company recorded out of period adjustments to correct immaterial misstatements related to accounting for business combinations. The Company changed the terms of its business combination agreements executed on or after November 12, 2021 to require future service to earn the deferred consideration that was payable as part of the acquisitions. The Company should have recorded post-combination expense for these deferred payments instead of recording them as contingent consideration in its business combinations. The immaterial out of period adjustments
resulted in a decrease to goodwill, total assets, other current liabilities, other non-current liabilities and total liabilities of $5,650, $5,650,$1,898, $2,450, and $4,348, respectively, and an increase to selling, general, and administrative expense during the quarter of $1,302.
Raiker Practice Acquisition
On February 12, 2021 ("Raiker Acquisition Date"), the Company entered into an asset purchase agreement and master services agreement ("Raiker MSA") with Anil N Raiker, M.D., P.L.C., d/b/a Pinellas Cancer Center (the "Raiker Practice" or "PCC") and Anil Raiker, M.D., an individual. Pursuant to the asset purchase agreement, the Company purchased from PCC certain non-clinical assets, properties, and rights. Pursuant to the Raiker MSA, TOI Management established an ongoing management services agreement which grants TOI Management the right to control the non-clinical and management operations of the Raiker Practice. Anil Raiker, M.D. continued to own all of the issued and outstanding equity interests of the Raiker Practice.
Pursuant to the Raiker MSA, and as further described in Note 17, TOI Management became the Raiker Practice's primary beneficiary and thus consolidated the Raiker Practice and its subsidiaries. The consolidation of the Raiker Practice (the "Raiker Practice Acquisition") at the Raiker Acquisition Date constituted a business combination in accordance with ASC 805.
The total consideration for the Acquisition was $1,710, comprised of a cash payment of $892 and deferred consideration of $818. The deferred cash consideration is to be paid in two equal installments on the first and second anniversary of the Raiker Acquisition Date (February 12, 2022 and 2023, respectively). On February 12, 2022, the Company transferred the first installment of deferred consideration of $409. Considering the Company's incremental borrowing rate, the present value of the deferred cash consideration is not materially different than its stated value.
Subsequent to the Acquisition, the Company filed an amendment to the articles of incorporation of PCC to legally change the name to The Oncology Institute FL, LLC. The change was solely nominal, and the legal form, tax attributes, and books and records of PCC all remained.
Grant Practice Acquisition
On November 12, 2021 ("Grant Acquisition Date"), the Company acquired certain non-clinical assets of Ellsworth Grant, M.D., A Medical Corporation (the “Grant Practice”) from Ellsworth Grant, M.D. (“Dr. Grant”). Further, TOI CA acquired certain clinical assets of the Grant Practice from Dr. Grant. Intangible assets of $450 were recognized pursuant to the acquisition in the form of clinical contracts with a weighted average amortization period of 5 years The Company transferred cash consideration of $849 and contingent consideration of $200 to Dr. Grant for the purchase. The contingent cash consideration is to be paid in two equal installments on the first and second anniversary of the Grant Acquisition Date (November 12, 2022 and 2023, respectively), pending Dr. Grant's continued employment at that time. The contingent consideration is accounted for as post-combination compensation expense to Dr. Grant.
The Grant Practice Acquisition was determined to constitute a business combination in accordance with ASC 805.
Orr Practice Acquisition
On November 12, 2021 ("Orr Acquisition Date"), the Company acquired certain non-clinical assets of Leo E. Orr, M.D., Inc. (the “Orr Practice”) from Leo E. Orr, M.D. (“Dr. Orr”). Further, TOI CA acquired certain clinical assets of the Orr Practice from Dr. Orr. Intangible assets of $150 were recognized pursuant to the acquisition in the form of clinical contracts with a weighted average amortization period of 5 years. The Company transferred cash consideration of $816 and contingent consideration of $200 to Dr. Orr for the purchase. The contingent cash consideration is to be paid in two equal installments on the first and second anniversary of the Orr Acquisition Date (November 12, 2022 and 2023, respectively), pending Dr. Orr's continued employment at that time. The contingent consideration is accounted for as post-combination compensation expense to Dr. Orr.
The Orr Practice Acquisition was determined to constitute a business combination in accordance with ASC 805.
Dave Practice Acquisition
On November 19, 2021 ("Dave Acquisition Date"), the Company acquired certain non-clinical assets of Sulaba Dave M.D., d.b.a. Radiation Oncology Associates (the “Dave Practice”) from Sulaba Dave M.D. (the “Dr. Dave”). Further, TOI CA acquired certain clinical assets of the Dave Practice from Dr. Dave. Intangible assets of $77 were recognized pursuant to the acquisition in the form of clinical contracts with a weighted average amortization period of 2 years. The Company transferred cash consideration of $2,000 and contingent consideration of $750 to Dr. Dave for the purchase. The contingent cash
consideration is to be paid in three equal installments on the six, twelfth, and eighteen month anniversaries of the Dave Acquisition Date (May 19, 2022, November 19, 2022, and May 19, 2023, respectively), pending Dr. Dave's continued employment and certain patient metrics being met at that time. The contingent consideration is accounted for as post-combination compensation expense to Dr. Dave. On May 19, 2022, the Company transferred the first installment of contingent consideration of $250.
The Dave Practice Acquisition was determined to constitute a business combination in accordance with ASC 805.
Yang Practice Acquisition
On December 9, 2021 ("Yang Acquisition Date"), the Company, acquired certain non-clinical assets of Global Oncology, Inc. (the “Yang Practice”) from Dr. Honghao Yang M.D. (“Dr. Yang”). Further, TOI CA acquired certain clinical assets of the Practice from Dr. Yang. Intangible assets of $68 were recognized pursuant to the acquisition in the form of clinical contracts with a weighted average amortization period of 5 years. The Company transferred cash consideration of $4,615 and contingent consideration of $2,500 to Dr. Yang for the purchase. The contingent cash consideration is to be paid in two equal installments on the first and second anniversary of the Yang Acquisition Date (December 9, 2022 and 2023, respectively), pending Dr. Yang's continued employment at that time. The contingent consideration is accounted for as post-combination compensation expense to Dr. Yang.
The Yang Practice Acquisition was determined to constitute a business combination in accordance with ASC 805.
Perkins Practice Acquisition
On April 30, 2022 ("Perkins Acquisition Date"), the Company acquired certain non-clinical assets of California Oncology of the Central Valley Medical Group, Inc., (the “Perkins Practice”) from Christopher Perkins, M.D. (“Dr. Perkins”). Further, TOI CA acquired certain clinical assets of the Perkins Practice from Dr. Perkins. In conjunction with the acquisition, the Company also entered into a Professional Service Agreement with Oncology Associates of Fresno Medical Group, Inc. Intangible assets of $2,550 were recognized pursuant to the acquisition in the form of trade names of $2,480 and clinical contracts of $70, with weighted average amortization periods of 10 years and 5 years respectively. The Company transferred cash consideration of $8,920 and contingent consideration of $2,000 to Dr. Perkins for the purchase. The contingent cash consideration is to be paid in two equal installments on the first and second anniversary of the transaction closing date (April 29, 2023 and 2024, respectively), pending Dr. Perkins' continued employment at that time. The contingent consideration is accounted for as post-combination compensation expense to Dr. Perkins.
The Perkins Practice Acquisition was determined to constitute a business combination in accordance with ASC 805.
Parikh Practice Acquisition
On July 22, 2022 ("Parikh Acquisition Date"), the Company acquired certain non-clinical assets of Nutan K. Parikh, M.D., LTD., (the “Parikh Practice”) from Nutan K. Parikh, M.D. (“Dr. Parikh”). Further, TOI CA acquired certain clinical assets of the Parikh Practice from Dr. Parikh. Intangible assets of $20 were recognized pursuant to the acquisition in the form of clinical contracts with a weighted average amortization period of 3 years. The Company transferred cash consideration of $1,908 and contingent consideration of $400 to Dr. Parikh for the purchase. The contingent cash consideration is to be paid in two equal installments on the first and second anniversary of the transaction closing date (July 22, 2023 and 2024, respectively), pending Dr. Parikh's continued employment at that time. The contingent consideration is accounted for as post-combination compensation expense to Dr. Parikh.
The Parikh Practice Acquisition was determined to constitute a business combination in accordance with ASC 805.
Barreras Practice Acquisition
On August 30, 2022 ("Barreras Acquisition Date"), the Company acquired certain non-clinical assets of Broward Oncology Associates, P.A., (the “Barreras Practice”) from Luis Barreras, M.D. (“Dr. Barreras”). Further, TOI FL acquired certain clinical assets of the Barreras Practice from Dr. Barreras. Intangible assets of $3 were recognized pursuant to the acquisition in the form of clinical contracts with a weighted average amortization period of 5 years. The Company transferred cash consideration of $929 and contingent consideration of $250 to Dr. Barreras for the purchase. The contingent cash consideration is to be paid in two equal installments on the first and second anniversary of the transaction closing date (August 30, 2023 and 2024, respectively), pending Dr. Barreras's continued employment at that time. The contingent consideration is accounted for as post-combination compensation expense to Dr. Barreras.
The Barreras Practice Acquisition was determined to constitute a business combination in accordance with ASC 805.
Summary of Consideration Transferred
Goodwill is calculated as the excess of the consideration transferred over the net assets recognized and represents the estimated future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. Such assets include synergies we expect to achieve, such as the use of our existing infrastructure to support the added membership, and future economic benefits arising from the assembled workforce. The purchase consideration for the acquisitions has been allocated under the acquisition method of accounting to the estimated fair market value of the net assets acquired including a residual amount of tax deductible goodwill as noted in the provisional fair value table below.
Acquisition costs amounted to $166 and $71 for the three months ended September 30, 2022 and 2021 respectively, and $699 and $268 for the nine months ended September 30, 2022 and 2021 respectively, and were recorded as “General and administrative expenses” in the accompanying Condensed Consolidated Statements of Income (Operations).
The following table summarizes the provisional fair values assigned to identifiable assets acquired and liabilities assumed.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Acquisition | |
| (in thousands) | Raiker | Grant | Orr | Dave | Yang | Perkins | Parikh | Barreras | Total |
| Consideration: | | | | | | | | | |
| Cash | $ | 892 | | $ | 849 | | $ | 816 | | $ | 2,000 | | $ | 4,615 | | $ | 8,920 | | $ | 1,908 | | $ | 929 | | $ | 20,929 | |
| Deferred | 818 | | — | | — | | — | | — | | — | | — | | — | | 818 | |
| Fair value of total consideration transferred | $ | 1,710 | | $ | 849 | | $ | 816 | | $ | 2,000 | | $ | 4,615 | | $ | 8,920 | | $ | 1,908 | | $ | 929 | | $ | 21,747 | |
| | | | | | | | | |
| Estimated fair value of identifiable assets acquired and liabilities assumed: |
| Cash | $ | 65 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 65 | |
| Accounts receivable | 398 | | — | | 183 | | — | | — | | — | | — | | — | | 581 | |
| Inventory | 62 | | 49 | | 16 | | — | | 115 | | 408 | | 307 | | 279 | | 1,236 | |
| | | | | | | | | |
| Property and equipment, net | — | | — | | 13 | | 35 | | 19 | | 123 | | 15 | | 23 | | 228 | |
| Clinical contracts | — | | 450 | | 150 | | 77 | | 68 | | 2,550 | | 20 | | 3 | | 3,318 | |
| | | | | | | | | |
| Goodwill | 1,454 | | 350 | | 637 | | 1,895 | | 4,413 | | 5,851 | | 1,566 | | 624 | | 16,790 | |
| Total assets acquired | 1,979 | | 849 | | 999 | | 2,007 | | 4,615 | | 8,932 | | 1,908 | | 929 | | 22,218 | |
| Accounts payable | 120 | | — | | — | | — | | — | | — | | — | | — | | 120 | |
| Accrued liabilities | — | | — | | — | | 7 | | — | | 12 | | — | | — | | 19 | |
| Current portion of long term debt | 149 | | — | | 183 | | — | | — | | — | | — | | — | | 332 | |
| Total liabilities assumed | 269 | | — | | 183 | | 7 | | — | | 12 | | — | | — | | 471 | |
| Net assets acquired | $ | 1,710 | | $ | 849 | | $ | 816 | | $ | 2,000 | | $ | 4,615 | | $ | 8,920 | | $ | 1,908 | | $ | 929 | | $ | 21,747 | |
The establishment of the allocation to goodwill requires the extensive use of accounting estimates and management judgement. The fair values assigned to the assets acquired are based on estimates and assumptions from data that is readily available.
Summary of Unaudited Supplemental Pro Forma Information
The revenues, earnings, and pro forma effects of the Raiker Practice Acquisition, which occurred during the nine months ended September 30, 2021, are not, and would not have been, material to the results of operations, individually and in aggregate. The Company recognized $4,501 cumulative revenue and $189 cumulative net income in its Condensed Consolidated Statement of Income (Operations) for the three months ended September 30, 2022, and $6,871 cumulative revenue and $41 cumulative net loss in its Condensed Consolidated Statement of Income (Operations) for the nine months ended September 30, 2022, from the clinical practices acquired during the nine months ended September 30, 2022.
The pro forma results presented below include the effects of the Acquisitions which occurred during the nine months ended September 30, 2022, as if they had occurred on January 1, 2021. The pro forma results for the three and nine months ended September 30, 2022 and 2021 include the additional amortization resulting from the adjustments to the value of intangible assets resulting from purchase accounting. The pro forma results do not include any anticipated synergies or other expected benefits of the acquisitions. The pro forma information does not purport to be indicative of what the Company's results of
operations would have been if the acquisitions had in fact occurred at the beginning of the period presented and is not intended to be a projection of the Company's future results of operations. Transaction expenses are included within the pro forma results.
| | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Revenue | $ | 66,193 | | | $ | 59,850 | | | $ | 194,167 | | | $ | 173,424 | |
| Net income (loss) | $ | (2,517) | | | $ | (1,777) | | | $ | 13,077 | | | $ | 2,905 | |
Mendez Asset Acquisition
On May 1, 2021, TOI Management, through PCC, entered into a purchase agreement to acquire certain clinical assets from Oncology Association, P.A. ("OA") from Pedro Mendez, M.D. Management determined the acquisition of OA is an asset acquisition. The Company paid $500, consisting of cash consideration of $200 and deferred cash consideration of $300, in exchange for intangible assets in the form of payor contracts. The entire $500 was assigned to the payor contract intangible asset class with a weighted average amortization period of 10 years. The deferred cash consideration is to be paid in three equal installments on the first, second, and third anniversaries of the Mendez Asset Acquisition Date (May 1, 2022, May 1, 2023, and May 1, 2024, respectively). On May 1, 2022, the Company transferred the first installment of deferred consideration of $100. Considering the Company's incremental borrowing rate, the present value of the deferred cash consideration is not materially different than its stated value.
Sapra Asset Acquisition
On July 1, 2022 ("Sapra Acquisition Date"), the Company acquired certain clinical assets of Ranjan K. Sapra, M.D. (the “Sapra Practice”) from Ranjan K. Sapra, M.D. (“Dr. Sapra”). The Company transferred cash consideration of $1 to Dr. Sapra for the purchase, which was assigned to property and equipment.
Note 17. Variable Interest Entities
The Company prepares its condensed consolidated financial statements in accordance with Accounting Standards Codification Topic No. 810, Consolidations (“ASC 810”), which provides for the consolidation of VIEs of which an entity is the primary beneficiary.
Pursuant to the MSAs established with the TOI PCs, TOI Management is entitled to receive a management fee, which represents a variable interest in and the right to receive the benefits of the TOI PCs. Through the terms of the MSAs, TOI Management receives the right to direct the most significant activities of the TOI PCs. Therefore, the TOI PCs are variable interest entities and TOI Management is the primary beneficiary that consolidates the TOI PCs, and their subsidiaries.
The condensed consolidated financial statements include the accounts of TOI and its subsidiaries and VIEs. All inter-company profits, transactions, and balances have been eliminated upon consolidation.
| | | | | | | | | | | |
| (in thousands) | September 30, 2022 | | December 31, 2021 |
| Assets | | | |
| Current assets: | | | |
| Cash and restricted cash | $ | 860 | | | $ | 1,618 | |
| Accounts receivable | 34,820 | | | 20,007 | |
| Other receivables | 219 | | | 935 | |
| Inventories, net | 10,018 | | | 6,438 | |
| Prepaid expenses | 897 | | | 781 | |
| Total current assets | 46,814 | | | 29,779 | |
| Property and equipment, net | 184 | | | — | |
| Other assets | 426 | | | 276 | |
| Intangible assets, net | 3,438 | | | 1,181 | |
| Goodwill | 15,486 | | | 11,096 | |
| Total assets | $ | 66,348 | | | $ | 42,332 | |
| | | | | | | | | | | |
| (in thousands) | September 30, 2022 | | December 31, 2021 |
| Liabilities | | | |
| Current liabilities: | | | |
| Accounts payable | $ | 9,383 | | | $ | 14,204 | |
| Income taxes payable | 132 | | | 132 | |
| Accrued expenses and other current liabilities | 6,405 | | | 5,539 | |
| Current portion of long-term debt | — | | | 183 | |
| Amounts due to affiliates | 122,417 | | | 56,312 | |
| Total current liabilities | 138,337 | | | 76,370 | |
| Other non-current liabilities | 833 | | | 3,203 | |
| Deferred income taxes liability | 58 | | | 6 | |
| Total liabilities | $ | 139,228 | | | $ | 79,579 | |
Single physician holders, who are officers of the Company, retain equity ownership in TOI CA, TOI FL and TOI TX, which represents nominal noncontrolling interests. The noncontrolling interests do not participate in the profit or loss of TOI CA or TOI FL, however.
As such, for the three months ended September 30, 2022, net loss of $(2,674) and $0 were attributable to TOI and to the noncontrolling interest, respectively. For the three months ended September 30, 2021, net loss of $(2,980) and $0 were attributable to TOI and to the noncontrolling interest, respectively.
For the nine months ended September 30, 2022, net income of $11,159 and $0 were attributable to TOI and to the noncontrolling interest, respectively. For the nine months ended September 30, 2021, net loss of $(771) and $0 were attributable to TOI and to the noncontrolling interest, respectively.
Note 18. Goodwill and Intangible Assets
The Company accounts for goodwill at acquisition-date fair value and other intangible assets at acquisition-date fair value less accumulated amortization. See Note 2 for a summary of the Company’s policies relating to goodwill and intangible assets.
Intangible Assets
As of September 30, 2022, the Company’s intangible assets, net consists of the following:
| | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | Weighted average amortization period | | Gross carrying amount | | Accumulated amortization | | Net carrying amount |
| Intangible assets | | | | | | | |
| Amortizing intangible assets: | | | | | | | |
| Payor contracts | 10 years | | $ | 19,400 | | | $ | (7,566) | | | $ | 11,834 | |
| Trade names | 10 years | | 6,650 | | | (1,778) | | | 4,872 | |
| Clinical contracts | 9 years | | 3,001 | | | (1,042) | | | 1,959 | |
| Total intangible assets | | | $ | 29,051 | | | $ | (10,386) | | | $ | 18,665 | |
As of December 31, 2021, the Company’s intangible assets, net consists of the following:
| | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | Weighted average amortization period | | Gross carrying amount | | Accumulated amortization | | Net carrying amount |
| Intangible assets | | | | | | | |
| Amortizing intangible assets: | | | | | | | |
| Payor contracts | 10 years | | $ | 19,400 | | | $ | (6,152) | | | $ | 13,248 | |
| Trade names | 10 years | | 4,170 | | | (1,350) | | | 2,820 | |
| Clinical contracts | 9 years | | 2,909 | | | (732) | | | 2,177 | |
| Total intangible assets | | | $ | 26,479 | | | $ | (8,234) | | | $ | 18,245 | |
The estimated aggregate amortization expense for each of the five succeeding fiscal years as of September 30, 2022 is as follows:
| | | | | |
| (in thousands) | Amount |
| Year ending December 31: | |
| 2022 | $ | 732 | |
| 2023 | 2,908 | |
| 2024 | 2,908 | |
| 2025 | 2,905 | |
| 2026 | 2,879 | |
| Thereafter | 6,333 | |
| Total | $ | 18,665 | |
The aggregate amortization expense during the three months ended September 30, 2022 and 2021 were $741 and $625, respectively. The aggregate amortization expense during the nine months ended September 30, 2022 and 2021 were $2,153 and $1,858, respectively.
Goodwill
The Company evaluates goodwill at the reporting unit level, which, for the Company, is at the level of the reportable segments, dispensary, patient services, and clinical trials & other. The goodwill allocated to each of the reporting units as of September 30, 2022 and December 31, 2021 is as follows:
| | | | | | | | | | | |
| (in thousands) | September 30, 2022 | | December 31, 2021 |
| Patient services | $ | 25,833 | | | $ | 21,443 | |
| Dispensary | 4,551 | | | 4,551 | |
| Clinical trials & other | 632 | | | 632 | |
| Total goodwill | $ | 31,016 | | | $ | 26,626 | |
The changes in the carrying amount of goodwill for the nine months ended September 30, 2022 and for the year ended December 31, 2021 are as follows:
| | | | | | | | | | | |
| (in thousands) | September 30, 2022 | | December 31, 2021 |
| Balance as of January 1: | | | |
| Gross goodwill | $ | 26,626 | | | $ | 14,227 | |
| Goodwill acquired during the period | 10,040 | | | 12,399 | |
| Goodwill corrected during the period (see Note 16) | (5,650) | | | — | |
| Accumulated impairment losses | — | | | — | |
| Goodwill, net as of September 30 and December 31 | $ | 31,016 | | | $ | 26,626 | |
Note 19. Net Income (Loss) Per Share
The following table sets forth the computation of the Company's basic net income (loss) per share to common stockholders for the three and nine months ended September 30, 2022 and 2021.
| | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands, except share data) | Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Net income (loss) attributable to TOI | $ | (2,674) | | | $ | (2,980) | | | $ | 11,159 | | | $ | (771) | |
| Less: Deemed dividend | — | | | — | | | 64 | | | — | |
| Net income (loss) attributable to TOI available for distribution | (2,674) | | | (2,980) | | | 11,095 | | | (771) | |
| Net income (loss) attributable to participating securities, basic | (499) | | | — | | | 2,290 | | | — | |
| Net income (loss) attributable to common stockholders, basic | $ | (2,175) | | | $ | (2,980) | | | $ | 8,805 | | | $ | (771) | |
| Weighted average common shares outstanding, basic | 72,184,366 | | | 66,021,828 | | | 72,807,277 | | | 64,977,298 | |
| Net income (loss) per share attributable to common stockholders, basic | $ | (0.03) | | | $ | (0.05) | | | $ | 0.12 | | | $ | (0.01) | |
The following table sets forth the computation of the Company's diluted net loss per share to common stockholders for the three and nine months ended September 30, 2022 and 2021.
| | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands, except share data) | Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Net income (loss) attributable to TOI | $ | (2,674) | | | $ | (2,980) | | | $ | 11,159 | | | $ | (771) | |
| Less: Deemed dividend | — | | | — | | | 64 | | | — | |
Less: Change in fair value of convertible option derivative liabilities(1) | 13,970 | | | — | | | 13,970 | | | — | |
| Net income (loss) attributable to TOI available for distribution | (16,644) | | | (2,980) | | | (2,875) | | | (771) | |
| Less: Net income attributable to participating securities, diluted | (2,867) | | | — | | | (515) | | | — | |
| Net income (loss) attributable to common stockholders, diluted | $ | (13,777) | | | $ | (2,980) | | | $ | (2,360) | | | $ | (771) | |
| Weighted average common shares outstanding, basic | 72,184,366 | | | 66,021,828 | | | 72,807,277 | | | 64,977,298 | |
| Dilutive effect of convertible note | 7,396,938 | | | — | | | 2,492,741 | | | — | |
| Weighted average shares outstanding, diluted | 79,581,304 | | | 66,021,828 | | | 75,300,018 | | | 64,977,298 | |
| Net income (loss) per share attributable to common stockholders, diluted | $ | (0.17) | | | $ | (0.05) | | | $ | (0.03) | | | $ | (0.01) | |
(1) Inclusive of interest expense and amortization of debt issuance cost and debt discount related to the Senior Secured Convertible Note.
The following potentially dilutive outstanding securities were excluded from the computation of diluted net loss per share because their effect would have been anti-dilutive for the periods presented:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Stock options | 7,188,865 | | | 9,156,138 | | | 7,188,865 | | | 9,156,138 | |
| RSUs | 2,170,047 | | | 1,367,463 | | | 2,170,047 | | | 1,367,463 | |
| Earnout Shares | 1,437,138 | | | — | | | 1,437,138 | | | — | |
| Public Warrants | 5,749,986 | | | — | | | 5,749,986 | | | — | |
| Private Warrants | 3,177,542 | | | — | | | 3,177,542 | | | — | |
Note 20. Segment Information
The Company operates its business and reports its results through three operating and reportable segments: dispensary, patient services, and clinical trials & other in accordance with ASC 280. See Note 2 for a summary of the Company’s policy on segment information.
Summarized financial information for the Company’s segments is shown in the following tables:
| | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Revenue | | | | | | | |
| Patient services | $ | 44,627 | | | $ | 32,967 | | | $ | 118,793 | | | $ | 92,375 | |
| Dispensary | 18,839 | | | 17,918 | | | 57,736 | | | 53,318 | |
| Clinical trials & other | 1,511 | | | 1,390 | | | 4,530 | | | 5,006 | |
| Consolidated revenue | 64,977 | | | 52,275 | | | 181,059 | | | 150,699 | |
| | | | | | | |
| Direct costs | | | | | | | |
| Patient services | 36,126 | | | 25,391 | | | 96,379 | | | 72,051 | |
| Dispensary | 15,738 | | | 15,279 | | | 47,816 | | | 45,639 | |
| Clinical trials & other | 113 | | | 182 | | | 400 | | | 494 | |
| Total segment direct costs | 51,977 | | | 40,852 | | | 144,595 | | | 118,184 | |
| | | | | | | |
| Depreciation expense | | | | | | | |
| Patient services | 316 | | | 181 | | | 848 | | | 447 | |
| Dispensary | — | | | 1 | | | — | | | 1 | |
| Clinical trials & other | 1 | | | 83 | | | 4 | | | 86 | |
| Total segment depreciation expense | 317 | | | 265 | | | 852 | | | 534 | |
| | | | | | | |
| Amortization of intangible assets | | | | | | | |
| Patient services | 688 | | | 573 | | | 1,995 | | | 1,701 | |
| Dispensary | — | | | — | | | — | | | — | |
| Clinical trials & other | 53 | | | 53 | | | 158 | | | 158 | |
| Total segment amortization | 741 | | | 626 | | | 2,153 | | | 1,859 | |
| | | | | | | |
| Operating income | | | | | | | |
| Patient services | 7,497 | | | 6,822 | | | 19,571 | | | 18,176 | |
| Dispensary | 3,101 | | | 2,638 | | | 9,920 | | | 7,678 | |
| Clinical trials & other | 1,344 | | | 1,072 | | | 3,968 | | | 4,268 | |
| Total segment operating income | 11,942 | | | 10,532 | | | 33,459 | | | 30,122 | |
| | | | | | | |
| Selling, general and administrative expense | 31,963 | | | 12,730 | | | 90,117 | | | 35,120 | |
| Non-segment depreciation and amortization | 76 | | | (41) | | | 214 | | | 28 | |
| Total consolidated operating loss | $ | (20,097) | | | $ | (2,157) | | | $ | (56,872) | | | $ | (5,026) | |
| | | | | | | | | | | |
| (in thousands) | September 30, 2022 | | December 31, 2021 |
| Assets | | | |
| Patient services | $ | 60,364 | | | $ | 44,223 | |
| Dispensary | 7,450 | | | 4,277 | |
| Clinical trials & other | 11,135 | | | 14,504 | |
| Non-segment assets | 204,853 | | | 140,435 | |
| Total assets | $ | 283,802 | | | $ | 203,439 | |
Note 21. Related Party Transactions
Related party transactions include payments for consulting services provided to the Company, clinical trials, board fees, and share repurchases. Related party payments for the three and nine months ended September 30, 2022 and 2021 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| Type | | 2022 | | 2021 | | 2022 | | 2021 |
| American Institute of Research | Consulting | | $ | 1 | | | $ | 42 | | | $ | 83 | | | $ | 105 | |
| Karen M Johnson | Board Fees | | 25 | | | — | | | 44 | | | — | |
| Richard Barasch | Board Fees | | — | | | — | | | 5 | | | — | |
| Anne M. McGeorge | Board Fees | | 25 | | | — | | | 44 | | | — | |
| Mohit Kaushal | Board Fees | | 25 | | | — | | | 44 | | | — | |
| Ravi Sarin | Board Fees | | 25 | | | — | | | 44 | | | — | |
| Maeve O'Meara Duke | Board Fees | | 25 | | | — | | | 44 | | | — | |
| Havencrest Capital Management, LLC | Management Fees | | — | | | — | | | — | | | 75 | |
| M33 Growth LLC | Management Fees | | — | | | — | | | — | | | 230 | |
| | | | | | | | | |
| Richy Agajanian MD | Share Repurchase | | — | | | 11 | | | 8,764 | | | 20 | |
| Veeral Desai | Board Fees | | — | | | 13 | | | — | | | 38 | |
| Total | | | $ | 126 | | | $ | 66 | | | $ | 9,072 | | | $ | 468 | |