# CROSS COUNTRY HEALTHCARE INC (CCRN) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from CROSS COUNTRY HEALTHCARE INC's 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1141103/000162828023004859/ccrn-20221231.htm
Accession: 0001628280-23-004859
Filing date: 2023-02-23
Report date: 2022-12-31
Extracted from Item 7 to the first post-MD&A boundary after HTML sanitization.
Confidence: high

Company profile: /company/CCRN/
All MD&A years: /company/CCRN/mda/
Previous year: /company/CCRN/mda/fy2021/ (FY 2021)
Next year: /company/CCRN/mda/fy2023/ (FY 2023)

Item 7.  Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with Item 1. Business, Item 1A. Risk Factors, Forward-Looking Statements, and Item 15. Consolidated Financial Statements and the accompanying notes and other data, all of which appear elsewhere in this Annual Report on Form 10-K.

Management's Discussion and Analysis below generally discusses 2022 and 2021 items and year-to-year comparisons between 2022 and 2021. Discussions of 2020 items and year-to-year comparisons between 2021 and 2020 that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021 filed with the SEC on February 28, 2022 and such information is incorporated herein by reference.

Business Overview

We provide total talent management services, including strategic workforce solutions, contingent staffing, permanent placement, and consultative services for healthcare customers across the continuum of care, by recruiting and placing highly qualified healthcare professionals in virtually every specialty and area of expertise. In addition to clinical roles such as school nurses, speech language, and behavioral therapists, we place non-clinical professionals such as teachers, substitute teachers, and other education specialties at educational facilities across the nation. Our diverse customer base includes both public and private acute care and non-acute care hospitals, outpatient clinics, ambulatory care facilities, single and multi-specialty physician practices, rehabilitation facilities, PACE programs, urgent care centers, local and national healthcare systems, managed care providers, public and charter schools, correctional facilities, government facilities, pharmacies, and many other healthcare providers. Through our national staffing teams, we offer our workforce solutions and place clinicians on travel and per diem assignments, local short-term contracts, and permanent positions. In addition, we continually evaluate opportunities to acquire companies that would complement or enhance our business, like Mint and HireUp.

Our workforce solutions include MSPs, RPO, project management, and other outsourcing and consultative services as described in Item 1. Business in this Annual Report on Form 10-K. By utilizing the solutions we offer, customers are able to better plan their personnel needs, optimize their talent acquisition and management processes, strategically flex and balance their workforce, have access to quality healthcare personnel, and provide continuity of care for improved patient outcomes. We have a history of investing in diversity, equality, and inclusion as a key component of the organization’s overall corporate social

24

responsibility program, which we believe is closely aligned with our core values to create a better future for our people, communities, and our stockholders.

The Company’s two reportable segments offer services to its customers as described below:

●    Nurse and Allied Staffing – For the year ended December 31, 2022, Nurse and Allied Staffing represented approximately 96% of total revenue. The Nurse and Allied Staffing segment provides workforce solutions and traditional staffing, including temporary and permanent placement of travel nurses and allied professionals, as well as per diem and contract nurses and allied personnel. We also provide clinical and non-clinical professionals on short-term and long-term assignments to customers such as local and national healthcare plans, managed care providers, public and charter schools, correctional facilities, skilled nursing facilities, and other non-acute settings. In addition, Nurse and Allied Staffing provides retained search services for healthcare professionals, as well as contingent search and recruitment process outsourcing services. We provide flexible workforce solutions to our healthcare customers through diversified offerings designed to meet their unique needs, including: MSP, RPO, and consulting services.

●    Physician Staffing – For the year ended December 31, 2022, Physician Staffing represented approximately 4% of total revenue. Physician Staffing provides physicians in many specialties, as well as CRNAs, NPs, and PAs as independent contractors on temporary assignments throughout the U.S.    

Summary of Operations

For the year ended December 31, 2022, revenue from services increased 67% year-over-year to $2.8 billion, due to strong performance in both our Nurse and Allied Staffing and Physician Staffing segments, primarily driven by an increase in volume growth and the number of professionals on assignment as a result of our investment in people and technology. Net income attributable to common stockholders for the year ended December 31, 2022 was $188.5 million, as compared to $132.0 million for the year ended December 31, 2021.

In addition to our scheduled payments, on June 23, 2022 and October 26, 2022, we made optional prepayments on our term loan of $50.0 million, totaling $100.0 million, to reduce interest costs, and incurred prepayment premiums of $1.0 million pursuant to the Term Loan Agreement.

On October 3, 2022, we entered into an asset purchase agreement with Mint Medical Physician Staffing, LP and Lotus Medical Staffing LLC, which expanded our locum tenens portfolio. On December 13, 2022, we entered into an asset purchase agreement with HireUp Leadership, Inc., which strengthened our position in the talent management landscape.

For the year ended December 31, 2022, cash flow provided by operating activities was $134.1 million, with net borrowings of $67.6 million on our senior secured asset-based credit facility (ABL), and an increase in working capital stemming from an increase in accounts receivable partly offset by the timing of disbursements. As of December 31, 2022, we had $3.6 million in cash and cash equivalents and a principal balance of $73.9 million outstanding on our term loan. Borrowing base availability under the ABL was $300.0 million, with $76.8 million of borrowings drawn under our ABL, and $18.2 million of undrawn letters of credit outstanding, leaving $205.0 million of excess availability. See Note 8 - Debt to our consolidated financial statements.

See Results of Operations, Segment Results, and Liquidity and Capital Resources sections that follow for further information.

Operating Metrics

We evaluate our financial condition by tracking operating metrics and financial results specific to each of our segments. Key operating metrics include hours worked, days filled, number of contract personnel on a full-time equivalent (FTE) basis, revenue per FTE, and revenue per day filled. Other operating metrics include number of open orders, candidate applications, contract bookings, length of assignment, bill and pay rates, and renewal and fill rates, number of active searches, and number of placements. These operating metrics are representative of trends that assist management in evaluating business performance. Due to the timing of our business process and other factors, certain of these operating metrics may not necessarily correlate to the reported U.S. GAAP results for the periods presented. Some of the segment financial results analyzed include revenue, operating expenses, and contribution income. In addition, we monitor cash flow, as well as operating and leverage ratios, to help us assess our liquidity needs.

25

[[GREPCENT_TABLE]]
[["Business Segment","Business Measurement"],["Nurse and Allied Staffing","FTEs represent the average number of Nurse and Allied Staffing contract personnel on a full-time equivalent basis."],["","Average revenue per FTE per day is calculated by dividing the Nurse and Allied Staffing revenue, excluding permanent placement, per FTE by the number of days worked in the respective periods."],["Physician Staffing","Days filled is calculated by dividing the total hours invoiced during the period, including an estimate for the impact of accrued revenue, by eight hours."],["","Revenue per day filled is calculated by dividing revenue as reported by days filled for the period presented."]]
[[/GREPCENT_TABLE]]

Results of Operations

The following table summarizes, for the periods indicated, selected consolidated statements of operations and comprehensive income (loss) data expressed as a percentage of revenue. Our historical results of operations are not necessarily indicative of future operating results.

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2022","","2021"],["Revenue from services","100.0","%","","100.0","%"],["Direct operating expenses","77.6","","","77.6"],["Selling, general and administrative expenses","11.6","","","12.8"],["Bad debt expense","0.3","","","0.3"],["Depreciation and amortization","0.5","","","0.6"],["Acquisition and integration-related costs","\u2014","","","0.1"],["Restructuring costs","0.1","","","0.2"],["Impairment charges","0.2","","","0.1"],["Income from operations","9.7","","","8.3"],["Interest expense","0.5","","","0.4"],["Loss on early extinguishment of debt","0.1","","","\u2014"],["Other income, net","\u2014","","","(0.1)"],["Income before income taxes","9.1","","","8.0"],["Income tax expense","2.4","","","0.1"],["Net income attributable to common stockholders","6.7","%","","7.9","%"]]
[[/GREPCENT_TABLE]]

26

Comparison of Results for the Year Ended December 31, 2022 compared to the Year Ended December 31, 2021

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","","","","","Increase (Decrease)","","Increase (Decrease)"],["","2022","","2021","","$","","%"],["","(Amounts in thousands)"],["Revenue from services","$","2,806,609","","","$","1,676,652","","","$","1,129,957","","","67.4","%"],["Direct operating expenses","2,178,923","","","1,301,653","","","877,270","","","67.4","%"],["Selling, general and administrative expenses","324,209","","","215,292","","","108,917","","","50.6","%"],["Bad debt expense","9,609","","","4,783","","","4,826","","","100.9","%"],["Depreciation and amortization","12,576","","","9,852","","","2,724","","","27.6","%"],["Acquisition and integration-related costs","726","","","1,068","","","(342)","","","(32.0)","%"],["Restructuring costs","1,861","","","2,630","","","(769)","","","(29.2)","%"],["Impairment charges","5,597","","","2,070","","","3,527","","","170.4","%"],["Income from operations","273,108","","","139,304","","","133,804","","","96.1","%"],["Interest expense","14,391","","","6,866","","","7,525","","","109.6","%"],["Loss on early extinguishment of debt","3,728","","","\u2014","","","3,728","","","100.0","%"],["Other income, net","(1,336)","","","(770)","","","(566)","","","(73.5)","%"],["Income before income taxes","256,325","","","133,208","","","123,117","","","92.4","%"],["Income tax expense","67,864","","","1,206","","","66,658","","","NM"],["Net income attributable to common stockholders","$","188,461","","","$","132,002","","","$","56,459","","","42.8","%"]]
[[/GREPCENT_TABLE]]

NM - Not meaningful

Revenue from services

Revenue from services increased $1.1 billion, or 67.4%, to $2.8 billion for the year ended December 31, 2022, as compared to $1.7 billion for the year ended December 31, 2021, due to strong performance in both our Nurse and Allied Staffing and Physician Staffing segments, primarily driven by an increase in the number of professionals on assignment, as well as higher bill rates in Nurse and Allied. See further discussion in Segment Results.

Direct operating expenses

Direct operating expenses are comprised primarily of field employee compensation and independent contractor expenses, housing expenses, travel expenses, and related insurance expenses. Direct operating expenses increased $877.3 million, or 67.4%, to $2.2 billion for the year ended December 31, 2022, as compared to $1.3 billion for the year ended December 31, 2021, as a result of revenue increases. As a percentage of total revenue, direct operating expenses were 77.6% for the years ended December 31, 2022 and 2021.

Selling, general and administrative expenses

Selling, general and administrative expenses increased $108.9 million, or 50.6%, to $324.2 million for the year ended December 31, 2022, as compared to $215.3 million for the year ended December 31, 2021, primarily due to increases in compensation and benefits, marketing and consulting expense, and computer subscription fees. As a percentage of total revenue, selling, general and administrative expenses decreased to 11.6% for the year ended December 31, 2022 as compared to 12.8% for the year ended December 31, 2021.

Bad Debt Expense

Bad debt expense for the year ended December 31, 2022 was $9.6 million as compared to $4.8 million for the year ended December 31, 2021. The increase is due primarily to higher receivables at year end with a 14 day increase in DSO year over year. As a percentage of revenue, bad debt expense was 0.3% for the years ended December 31, 2022 and 2021.

27

Depreciation and amortization expense

Depreciation and amortization expense for the year ended December 31, 2022 was $12.6 million as compared to $9.9 million for the year ended December 31, 2021. The increase is primarily due to the additional amortization of other intangible assets from the WSG and Selected acquisitions. See Note 5 - Goodwill, Trade Names, and Other Intangible Assets to our consolidated financial statements. As a percentage of revenue, depreciation and amortization expense was 0.5% for the year ended December 31, 2022 and 0.6% for the year ended December 31, 2021.

Acquisition and integration-related costs

Acquisition and integration-related costs for the year ended December 31, 2022 included costs for legal and advisory fees for the Mint and Lotus acquisition that closed in October 2022 and the HireUp acquisition that closed in December 2022. Acquisition and integration-related costs for the year ended December 31, 2021 included costs for legal and advisory fees, as well as integration costs, for the WSG acquisition that closed late in the second quarter of 2021, and legal and professional fees for the Selected acquisition that closed late in the fourth quarter of 2021.

Restructuring costs

Restructuring costs for the years ended December 31, 2022 and 2021 were primarily comprised of employee termination costs and ongoing lease costs related to the Company's strategic reduction of its real estate footprint and totaled $1.9 million and $2.6 million, respectively. Amounts for the year ended December 31, 2022 include a benefit associated with the early termination of the lease for one of the Company's corporate offices in the second quarter, which was previously restructured.

Impairment charges

Non-cash impairment charges totaled $5.6 million for the year ended December 31, 2022 and related to real estate restructuring activities and the write-off of a discontinued IT project. Non-cash impairment charges totaled $2.1 million for the year ended December 31, 2021 and related to real estate restructuring activities and the write-off of a discontinued software development project. See Note 5 - Goodwill, Trade Names, and Other Intangible Assets and Note 9 - Leases to our consolidated financial statements.

Interest expense

Interest expense was $14.4 million for the year ended December 31, 2022 compared to $6.9 million for the year ended December 31, 2021, due to higher average borrowings and a higher effective interest rate. The effective interest rate on our borrowings was 9.1% and 5.7% for the years ended December 31, 2022 and 2021, respectively.

Loss on early extinguishment of debt

Loss on early extinguishment of debt for the year ended December 31, 2022 consisted of a prepayment premium and the write-off of debt issuance costs related to the optional prepayments on our term loan made in the second and fourth quarters of 2022. There were no such expenses for the year ended December 31, 2021.

Other income, net

For the year ended December 31, 2022, other income, net included a $1.1 million gain on lease termination as a result of the early termination of one of our corporate offices.

28

Income tax expense

Income tax expense totaled $67.9 million for the year ended December 31, 2022, compared to $1.2 million for the year ended December 31, 2021. The effective tax rate was 26.5% and 1.0%, including the impact of discrete items, for the years ended December 31, 2022 and 2021, respectively. The effective tax rate in 2022 was impacted by federal, international, and state taxes. The effective tax rate in 2021 was impacted by the release of valuation allowance on deferred tax assets and federal, international, and state taxes.

For the year ended December 31, 2021, we recorded a net valuation allowance release of $37.5 million (comprised of $18.4 million related to federal NOLs, $7.5 million related to state NOLs, and $11.6 million related to other net deferred tax assets) on the basis of management’s reassessment of the amount of its deferred tax assets that are more likely than not to be realized. The valuation allowance on an immaterial amount of state NOLs was not released due to the respective expiration periods and specific state taxable income projections. See Note 13 - Income Taxes to our consolidated financial statements.

Segment Results

Information on operating segments and a reconciliation to income from operations for the periods indicated are as follows:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2022","","2021"],["","(amounts in thousands)"],["Revenues from services:"],["Nurse and Allied Staffing","$","2,700,383","","","$","1,605,781"],["Physician Staffing","106,226","","","70,871"],["","$","2,806,609","","","$","1,676,652"],["Contribution income:"],["Nurse and Allied Staffing","$","355,447","","","$","205,738"],["Physician Staffing","5,508","","","4,328"],["","360,955","","","210,066"],["Corporate overhead","67,087","","","55,142"],["Depreciation and amortization","12,576","","","9,852"],["Acquisition and integration-related costs","726","","","1,068"],["Restructuring costs","1,861","","","2,630"],["Impairment charges","5,597","","","2,070"],["Income from operations","$","273,108","","","$","139,304"]]
[[/GREPCENT_TABLE]]

In the first quarter of 2021, the Company modified its reportable segments and, as a result, now discloses the following two reportable segments - Nurse and Allied Staffing and Physician Staffing. See Note 17 - Segment Data.

Certain statistical data for our business segments for the periods indicated are as follows:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","","","Percent"],["","2022","","2021","","Change","","Change"],["Nurse and Allied Staffing statistical data:"],["FTEs","12,980","","","8,679","","","4,301","","","49.6","%"],["Average Nurse and Allied Staffing revenue per FTE per day","$","565","","","$","503","","","$","62","","","12.3","%"],["Physician Staffing statistical data:"],["Days filled","60,038","","","44,169","","","15,869","","","35.9","%"],["Revenue per day filled","$","1,769","","","$","1,605","","","$","164","","","10.2","%"]]
[[/GREPCENT_TABLE]]

See definition of Business Measurements under the Operating Metrics section of our Management's Discussion and Analysis.

29

Segment Comparison - Year Ended December 31, 2022 compared to the Year Ended December 31, 2021

Nurse and Allied Staffing

Revenue increased $1.1 billion, or 68.2% to $2.7 billion for the year ended December 31, 2022, from $1.6 billion for the year ended December 31, 2021, through strong performance driven by volume increases and higher bill rates.

Contribution income for the year ended December 31, 2022, increased $149.7 million or 72.8%, to $355.4 million from $205.7 million for the year ended December 31, 2021, driven by increased revenue. As a percentage of segment revenue, contribution income margin increased to 13.2% for the year ended December 31, 2022 from 12.8% for the year ended December 31, 2021.

The average number of FTEs on contract during the year ended December 31, 2022 increased 49.6% from the year ended December 31, 2021, primarily due to headcount growth in travel nurse and allied, as well as additional headcount resulting from the WSG acquisition. Average revenue per FTE per day increased approximately 12.3% in the year ended December 31, 2022 compared to the year ended December 31, 2021, due to the increase in the average travel bill rates.

Physician Staffing

Revenue increased $35.3 million, or 49.9% to $106.2 million for the year ended December 31, 2022, compared to $70.9 million for the year ended December 31, 2021, primarily due to an increase in volume in several specialties.

Contribution income for the year ended December 31, 2022, increased $1.2 million or 27.3% to $5.5 million compared to $4.3 million in the year ended December 31, 2021. As a percentage of segment revenue, contribution income was 5.2% for the year ended December 31, 2022 and 6.1% for the year ended December 31, 2021, driven by higher revenue, partially offset by higher direct costs.

Total days filled increased 35.9% to 60,038 in the year ended December 31, 2022, compared to 44,169 in the year ended December 31, 2021. Revenue per day filled was $1,769 for the year ended December 31, 2022 and $1,605 for the year ended December 31, 2021.

Corporate overhead

Corporate overhead includes unallocated executive leadership and other centralized corporate functional support costs such as finance, IT, legal, human resources, and marketing, as well as public company expenses and corporate-wide projects. Corporate overhead increased to $67.1 million for the year ended December 31, 2022, from $55.1 million for the year ended December 31, 2021, primarily due to increases in compensation and benefit expense, legal expense, and computer expense. As a percentage of consolidated revenue, corporate overhead was 2.4% for the year ended December 31, 2022, and 3.3% for the year ended December 31, 2021.

Liquidity and Capital Resources

At December 31, 2022, we reported $3.6 million in cash and cash equivalents, $73.9 million of term loan outstanding, at par, and $76.8 million of borrowings drawn under our ABL. Working capital increased by $95.5 million to $404.0 million as of December 31, 2022, compared to $308.5 million as of December 31, 2021, primarily due to an increase in accounts receivable, partially offset by the timing of disbursements. As of December 31, 2022, our days' sales outstanding, net of amounts owed to subcontractors, was 72 days, up 14 days year-over-year, primarily due to the timing of collections throughout the year. As of December 31, 2022, we do not have any off-balance sheet arrangements.

Our operating cash flow constitutes our primary source of liquidity and, historically, has been sufficient to fund our working capital, capital expenditures, internal business expansion, and debt service. This includes our commitments, both short-term and long-term, of interest expense on our debt and operating lease commitments, and future principal payments on our term loan and our ABL credit facility. We expect to meet our future needs from a combination of cash on hand, operating cash flows, and funds available through the ABL. See debt discussion which follows.

In the third quarter of 2022, our Board of Directors authorized the New Repurchase Program, whereby we may repurchase up to $100.0 million of our shares of common stock. Upon completion of the authorized number of shares available for repurchase under the Prior Repurchase Program, we commenced repurchases under the New Repurchase Program during the third quarter of 2022. During the third and fourth quarters, we repurchased, under both the Prior Repurchase Program and the New

30

Repurchase Program, a total of 1,364,815 shares of common stock for $35.3 million, at an average market price of $25.83 per share. As of December 31, 2022, we had $76.2 million remaining for share repurchase under the New Repurchase Program, subject to certain conditions in our Loan Agreement and Term Loan Agreement. During the fourth quarter of 2022, we entered into a Rule 10b5-1 Repurchase Plan to allow for share repurchases during our blackout periods.

Cash Flow Comparisons

Year Ended December 31, 2022 Compared to Year Ended December 31, 2021

Net cash provided by operating activities during the year ended December 31, 2022 was $134.1 million compared to net cash used in operating activities of $85.6 million during the year ended December 31, 2021. The year over year improvement in cash flow from operations was primarily due to the investments in net working capital with higher accounts receivables stemming from the rapid growth in the business in late 2021 into early 2022.

Net cash used in investing activities during the year ended December 31, 2022 was $43.9 million compared to $34.0 million in the year ended December 31, 2021. Net cash used in the year ended December 31, 2022 included $35.1 million primarily related to the acquisitions of Mint and HireUp, as well as capital expenditures, primarily related to multiple IT projects. Net cash used for the year ended December 31, 2021 included $26.9 million related to the acquisitions of WSG and Selected, as well as capital expenditures and the build-out of our corporate office.  

Net cash used in financing activities for the year ended December 31, 2022 was $87.6 million, compared to net cash provided by financing activities of $119.1 million during the year ended December 31, 2021. During the year ended December 31, 2022, we reported $67.6 million of net borrowings on our ABL and used cash to repay borrowings of $100.4 million on our term loan, $2.4 million on our note payable, $5.3 million for income taxes on share-based compensation, $3.2 million in debt issuance costs, $35.3 million for share repurchases, $7.5 million for contingent consideration, and $1.1 million for other financing activities. During the year ended December 31, 2021, we reported net borrowings of $175.0 million on our term loan, and used cash to repay borrowing on our ABL of $44.2 million, $0.7 million principal payment on our term loan, $2.4 million on our note payable, $6.1 million of debt issuance costs, $2.2 million for income taxes on share-based compensation, and an immaterial amount for other financing activities.

Debt

2021 Term Loan Agreement

As more fully described in Note 8 - Debt to our consolidated financial statements, on June 8, 2021, we entered into a Term Loan Agreement, which provides for a six-year second lien subordinated term loan in the amount of $100.0 million (term loan). The term loan has an interest rate of one-month LIBOR plus 5.75% per annum, subject to a 0.75% LIBOR floor. The term loan was used to pay the cash consideration, as well as any costs, fees, and expenses in connection with the WSG acquisition (see Note 4 - Acquisitions to our consolidated financial statements), with the remainder used to pay down a portion of the asset-based credit facility.

The borrowings under the Term Loan Agreement generally bear interest at a variable rate based on either LIBOR or Base Rate (as defined in the Term Loan Agreement) and are subject to mandatory prepayments of principal payable in quarterly installments, commencing on September 30, 2021, with each installment being in the aggregate principal amount of $0.3 million (subject to adjustment as a result of prepayments) provided that, to the extent not previously paid, the aggregate unpaid principal balance would be due and payable on the maturity date. The Term Loan Agreement contains various restrictions and covenants applicable to the Company and its subsidiaries, including a covenant to maintain a minimum net leverage ratio. The Company was in compliance with this covenant as of December 31, 2022. Obligations under the Term Loan Agreement are secured by substantially all the assets of the borrowers and guarantors under the Term Loan Agreement, subject to customary exceptions.

On November 18, 2021, we amended the Term Loan Agreement (Term Loan First Amendment), which provided the Company an incremental term loan in an aggregate amount equal to $75.0 million. Additionally, the Term Loan First Amendment increased the aggregate amount of all increases (as defined in the Term Loan Agreement) to be no greater than $115.0 million. The borrowings will be used primarily to fund organic growth. Commencing on December 31, 2021, installments of the mandatory prepayments will be in the aggregate principal amount of $0.4 million. All other terms, conditions, covenants, and pricing of the Term Loan Agreement remain the same.

31

In addition to our scheduled payments, on June 23, 2022 and October 26, 2022, we made optional prepayments of $50.0 million, totaling $100.0 million, to reduce interest costs, and incurred prepayment premiums of $1.0 million pursuant to the Term Loan Agreement. As a result of the early prepayments, debt issuance costs of $1.4 million and $1.3 million were written off in the second and fourth quarters of 2022, respectively. The prepayment premiums and the write-off of debt issuance costs are included as loss on early extinguishment of debt in the consolidated statements of operations and comprehensive income (loss).

In the first quarter of 2023, we expect to amend our Term Loan Agreement to convert the LIBOR rates to SOFR rates.

2019 Loan Agreement

Effective October 25, 2019, our prior senior credit facility entered into in August 2017 was replaced by a $120.0 million Loan Agreement, which provides for a five-year senior secured revolving credit facility. On June 30, 2020, we amended the Loan Agreement (First Amendment), which increased the current aggregate committed size of the ABL from $120.0 million to $130.0 million. All other terms, conditions, covenants, and pricing of the Loan Agreement remained the same. On March 8, 2021, we amended the Loan Agreement (Second Amendment), which increased the current aggregate committed size of the ABL from $130.0 million to $150.0 million, increased certain borrowing base sub-limits, and decreased both the cash dominion event and financial reporting triggers. On June 8, 2021, we amended the Loan Agreement (Third Amendment), which permits the incurrence of indebtedness and grant of security as set forth in the Loan Agreement and in accordance with the Intercreditor Agreement, and provides mechanics relating to a transition away from LIBOR as a benchmark interest rate to a replacement alternative benchmark rate or mechanism for loans made in U.S. dollars. On November 18, 2021, we amended the Loan Agreement (Fourth Amendment), whereby the permitted indebtedness (as defined in the Loan Agreement) was increased to $175.0 million. On March 21, 2022, we amended the Loan Agreement (Fifth Amendment), which increased the current aggregate committed size of the ABL from $150.0 million to $300.0 million, extended the credit facility for an additional five years, increased certain borrowing base sub-limits, and provided the option for all or a portion of the borrowings to bear interest at a rate based on the Secured Overnight Financing Rate (SOFR) or Base Rate, at the election of the borrowers, plus an applicable margin.

As of December 31, 2022, the interest rate spreads and fees under the Loan Agreement were based on SOFR plus 1.85% for the revolving portion of the borrowing base. The Base Rate (as defined by the Loan Agreement) margin would have been 0.75% for the revolving portion. The SOFR and Base Rate margins are subject to monthly pricing adjustments, pursuant to a pricing matrix based on our excess availability under the revolving credit facility. In addition, the facility is subject to an unused line fee, letter of credit fees, and an administrative fee. The Loan Agreement contains various restrictions and covenants, including a covenant to maintain a minimum fixed charge coverage ratio. We were in compliance with the fixed charge coverage ratio covenant as of December 31, 2022. Borrowing base availability under the ABL was $300.0 million at December 31, 2022, with $76.8 million of borrowings drawn as well as $18.2 million of letters of credit outstanding, leaving $205.0 million of excess availability.

Note Payable

The first two installments of $2.4 million each related to the subordinated promissory note payable, made in connection with the New Mediscan II, LLC, Mediscan Diagnostic Services, LLC, and Mediscan Nursing Staffing, LLC (collectively Mediscan) acquisition, were paid in the second quarter of 2020 and in the first quarter of 2021, respectively. The third and final installment of $2.6 million, including interest of 2% per annum, accruing from April 1, 2020, was paid in the first quarter of 2022. See Note 4 - Acquisitions.

See Note 8 - Debt to our consolidated financial statements.

Critical Accounting Policies and Estimates

We have identified the following critical accounting policies that affect the more significant judgments and estimates used in the preparation of our consolidated financial statements. The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and judgments that affect our reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. We evaluate our estimates on an on-going basis, including those related to asset impairment, accruals for self-insurance, allowance for doubtful accounts and sales allowances, taxes and other contingencies, and litigation. We state our accounting policies in the notes to the audited consolidated financial statements for the year ended December 31, 2022, contained herein. These estimates are based on information that is currently available to us and on various assumptions that we

32

believe to be reasonable under the circumstances. Actual results could vary from those estimates under different assumptions or conditions.

We believe that the following critical accounting policies affect the more significant judgments and estimates used in the preparation of our consolidated financial statements:

Goodwill, trade names, and other intangible assets

Our business acquisitions typically result in the recording of goodwill, trade names, and other intangible assets, and the recorded values of those assets may become impaired in the future. The determination of the value of such intangible assets requires management to make estimates and assumptions that affect our consolidated financial statements. For intangible assets purchased in a business combination, the estimated fair values of the assets received are used to establish their recorded values. As more fully described in Note 2 - Summary of Significant Accounting Policies, we assess the impairment of goodwill of our reporting units and indefinite-lived intangible assets annually, or more often if events or changes in circumstances indicate that the carrying value may not be recoverable.

Application of the goodwill impairment test requires judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units, assignment of goodwill to reporting units, and determination of the fair value of each reporting unit. Significant judgments are required to estimate the fair value of reporting units including estimating future cash flows, and determining appropriate discount rates, growth rates, company control premium, and other assumptions. Changes in these estimates and assumptions could materially affect the determination of fair value for each reporting unit. See Note 5 - Goodwill, Trade Names, and Other Intangible Assets, where impairment testing in 2022, 2021, and 2020 is more fully described.

Indefinite-lived intangible assets related to our trade names were not amortized but instead tested for impairment at least annually, or more frequently should an event or circumstances indicate that a reduction in fair value may have occurred. We perform testing of indefinite-lived intangible assets, other than goodwill, at the asset group level using the relief from royalty method. If the carrying value exceeds the fair value, an impairment loss is recorded for that excess.

There can be no assurance that the estimates and assumptions made for purposes of the annual impairment test will prove to be accurate predictions of the future. Although management believes the assumptions and estimates made are reasonable and appropriate, different assumptions and estimates could materially impact the reported financial results.

In addition, we are required to test the recoverability of long-lived assets, including identifiable intangible assets with definite lives, whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. In testing for potential impairment, if the carrying value of the asset group exceeds the expected undiscounted cash flows, we must then determine the amount by which the fair value of those assets exceeds the carrying value and determine the amount of impairment, if any.

Risk and Uncertainties

The calculation of fair value used in these impairment assessments included a number of estimates and assumptions that required significant judgments, including projections of future income and cash flows, long-term growth rates, the identification of appropriate market multiples, royalty rates, and the choice of an appropriate discount rate. See Note 5 - Goodwill, Trade Names, and Other Intangible Assets. In addition, deterioration of demand for our services, deterioration of labor market conditions, reduction of our stock price for an extended period, or other factors as described in Item 1A. Risk Factors, may affect our determination of fair value of goodwill, trade names, or other intangible assets. This evaluation can also be triggered by various indicators of impairment which could cause the estimated discounted cash flows to be less than the carrying amount of net assets. If we are required to record an impairment charge in the future, it could have an adverse impact on our results of operations. Under the current credit agreements, an impairment charge will not have an impact on our liquidity. As of December 31, 2022, we had total goodwill and other intangible assets of $208.0 million or 21.9% of our total assets.

Health, workers' compensation, and professional liability expense

We maintain accruals for our health, workers’ compensation, and professional liability claims that are partially self-insured and are classified as accrued compensation and benefits on our consolidated balance sheets. We determine the adequacy of these accruals by periodically evaluating our historical experience and trends related to health, workers’ compensation, and professional liability claims and payments, based on actuarial models, as well as industry experience and trends. If such models indicate that our accruals are overstated or understated, we will adjust accruals as appropriate. Healthcare insurance accruals

33

have fluctuated with increases or decreases in the average number of corporate employees and healthcare professionals on assignment as well as actual company experience and increases in national healthcare costs. As of December 31, 2022 and 2021, we had $6.2 million and $4.1 million accrued, respectively, for incurred but not reported health insurance claims. Corporate and field employees are covered through a partially self-insured health plan. Workers’ compensation insurance accruals can fluctuate over time due to the number of employees and inflation, as well as additional exposures arising from the current policy year. As of December 31, 2022, and 2021, we had $14.9 million and $12.5 million accrued for case reserves and for incurred but not reported workers’ compensation claims, net of insurance receivables, respectively. The accrual for workers’ compensation is based on an actuarial model which is prepared or reviewed by an independent actuary quarterly. As of December 31, 2022, and 2021, we had $4.2 million and $4.9 million accrued, respectively, for case reserves and for incurred but not reported professional liability claims, net of insurance receivables. The accrual for professional liability is based on actuarial models which are prepared by an independent actuary quarterly.

Revenue recognition

We recognize revenue from our services when control of the promised services is transferred to our customers, in an amount that reflects the consideration we expect to receive in exchange for the service. We have concluded that transfer of control of our staffing services, which represents the majority of our revenues, occurs over time as the services are provided.

The following is a description of the nature, amount, timing and uncertainty of revenue and cash flows from which we generate revenue.

Temporary Staffing Revenue

Revenue from temporary staffing is recognized as control of the services is transferred over time, and is based on hours worked by our field staff. We recognize the majority of our revenue at the contractual amount we have the right to invoice for services completed to date. Generally, billing to customers occurs weekly, bi-weekly, or monthly and is aligned with the payment of services to the temporary staff. Accounts receivable includes estimated revenue for employees’ and independent contractors’ time worked but not yet invoiced. At December 31, 2022 and December 31, 2021, our estimate of amounts that had been worked but had not been billed totaled $152.4 million and $140.0 million, respectively, and are included in accounts receivable in the consolidated balance sheets.

Other Services Revenue

We offer other services to our customers that are transferred over time including: MSPs providing agency services (as further described below in Gross Versus Net Policies), RPO, other outsourcing services, and retained search services, as well as separately billable travel and housing costs, which in total amount to less than 5% of our consolidated revenue for the years ended December 31, 2022, 2021, and 2020. Generally, billing and payment terms for MSP agency services are consistent with temporary staffing as the customers are similar or the same. Revenue from these services is recognized based on the contractual amount for services completed to date which best depicts the transfer of control of services.

For our RPO, other outsourcing, and retained search services, revenue is generally recognized in the amount to which the entity has a right to invoice which corresponds directly with the value to the customer. We do not, in the ordinary course of business, offer warranties or refunds.

Gross Versus Net Policies

We record revenue on a gross basis as a principal or on a net basis as an agent depending on the contracted arrangement, as follows:

•We have certain contracts with acute care facilities to provide comprehensive MSP solutions. Under these contract arrangements, we primarily use our nurses, along with third-party subcontractors, to fulfill customer orders. If a subcontractor is used, we invoice our customer for these services, but revenue is recorded at the time of billing, net of any related subcontractor liability. The resulting net revenue represents the administrative fee charged by us for our MSP services.

•Revenue from our Physician Staffing business is recognized on a gross basis as we are the principal in the arrangements.

34

Allowances

We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments, which results in a provision for bad debt expense. We determine the adequacy of this allowance based on historical write-off experience, current conditions, an analysis of the aging of outstanding receivable and customer payment patterns, and specific reserves for customers in adverse conditions adjusted for current expectations for the customers or industry. Based on the information currently available, we also considered current expectations of future economic conditions, including the impact of the ongoing COVID pandemic, when estimating our allowance for doubtful accounts. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. We write off specific accounts based on an ongoing review of collectability as well as our past experience with the customer. In addition, we maintain a sales allowance for rate and hour differences which may arise in the ordinary course of business and adjustments to the reserve are recorded as contra-revenue. As of December 31, 2022 and 2021, our total allowances were $14.7 million and $6.9 million, respectively.

Contingent liabilities

We are subject to various litigation, claims, investigations, and other proceedings that arise in the ordinary course of our business. These matters primarily relate to employee-related matters that include individual and collective claims, professional liability, tax, and payroll practices. Our healthcare facility customers may also become subject to claims, governmental inquiries and investigations, and legal actions to which we may become a party relating to services provided by our professionals. We record a liability when available information indicates that a loss is probable, and an amount or range of loss can be reasonably estimated. Significant judgment is required to determine both the probability of loss and the estimated amount. At least quarterly, we review our accrual and/or disclosures to reflect the impact of negotiations, settlements, rulings, advice of legal counsel, or new information. However, losses ultimately incurred could materially differ from amounts accrued. See Note 12 - Contingencies.

Income taxes

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and other loss carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. During 2021, the Company fully utilized its federal NOL carryforward and a significant amount of state NOLs. As of December 31, 2022, we have deferred tax assets related to certain state and foreign NOL carryforwards of $1.4 million. But for those NOL carryforwards with an indefinite carryover, the carryforwards will expire as follows: state between 2023 and 2040, and foreign between 2023 and 2027. As of December 31, 2021, we had deferred tax assets related to certain state and foreign NOL carryforwards of $4.5 million.

As of December 31, 2022 and 2021, we had an immaterial amount of valuation allowances on our deferred tax assets. For the year ended December 31, 2021, we recorded a valuation allowance release of $37.5 million (comprised of $18.4 million related to federal NOLs, $7.5 million related to state NOLs, and $11.6 million related to other net deferred tax assets) on the basis of management’s reassessment of the amount of its deferred tax assets that are more likely than not to be realized. For the year ended December 31, 2021, the valuation allowance on an immaterial amount of state NOLs was not released due to the respective expiration periods and specific state taxable income projections. See Note 13 - Income Taxes to our consolidated financial statements.

As of each reporting date, management considers new evidence, both positive and negative, that could affect its view of the future realization of deferred tax assets. As of December 31, 2021, in part because for the 12 quarters ended December 31, 2021, the Company had $110.3 million in cumulative pretax income including permanent items. The Company also has a history of utilizing NOLs prior to expiration, most notably the full utilization of the federal net operating loss carryforward in 2021. The Company forecasts positive pretax book income which is expected to exceed the reversal of its future tax deductions, further proving future estimates of taxable income. Management determined that there was sufficient positive evidence to conclude that it is more likely than not that our net deferred tax assets are realizable. Growth estimates are tied to the increasing demand for healthcare solutions for our customers, including an aging U.S. population, and our customers’ need to keep costs down by using our staffing solutions. We therefore reduced the valuation allowance accordingly.

With regard to negative evidence, the Company did not have any material taxable temporary differences to offset deductible temporary differences and did not have any taxable income available for carryback to offset NOLs. As such, the primary focus

35

of our analysis emphasized the current and prior two-year cumulative pretax income analysis, the full utilization of the federal net operating loss carryforward, and projections of future taxable income.

We are subject to income taxes in the U.S. and certain foreign jurisdictions. Significant judgment is required in determining our consolidated provision for income taxes and recording the related deferred tax assets and liabilities. In the ordinary course of our business there are many transactions and calculations where the ultimate tax determination is uncertain. An unrecognized tax benefit represents the difference between the recognition of benefits related to exposure items for income tax reporting purposes and financial reporting purposes. For the years ended December 31, 2022 and 2021, the unrecognized tax benefit is included in uncertain tax positions - non-current in the consolidated balance sheets. However, for the year ended December 31, 2021, $0.4 million of the unrecognized tax benefit is classified as an offset to certain state NOLs within the deferred tax asset. As of December 31, 2022, total unrecognized tax benefits recorded was $7.6 million. We reserve for interest and penalties on exposure items, if applicable, which is recorded as a component of the overall income tax provision.

We are regularly under audit by tax authorities. Although the outcome of tax audits is always uncertain, we believe that we have appropriate support for the positions taken on our tax returns and that our annual tax provision includes amounts sufficient to pay any assessments. Nonetheless, the amounts ultimately paid, if any, upon resolution of the issues raised by the taxing authorities may differ materially from the amounts accrued for each year.

Seasonality

See Item 1. Business.

Inflation

We do not believe that inflation had a significant impact on our results of operations for the periods presented. On an ongoing basis, we seek to ensure that billing rates reflect increases in costs due to inflation. In addition, we attempt to minimize any residual impact on our operating results by controlling operating costs.

Recent Accounting Pronouncements

See Note 2 - Summary of Significant Accounting Policies to our consolidated financial statements.

Stockholders' Equity

See Note 14 - Stockholders' Equity to our consolidated financial statements.

Transactions with Related Parties

See Note 16 - Related Party Transactions to our consolidated financial statements.