Starling Oncology, Inc. (TOI) FY 2024 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis provides information that management believes is relevant to an assessment and understanding of the consolidated results of operations and financial condition of The Oncology Institute, Inc. ("TOI") along with its consolidating subsidiaries (the "Company"). The discussion should be read together with the historical audited annual financial statements for the years ended December 31, 2024 and 2023, and the related notes that are included elsewhere in this Annual Report. The information in this discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 (as amended, "Securities Act"), as amended, and Section 21E of the Securities Exchange Act of 1934 (as amended, the "Exchange Act"). Such statements are based upon current expectations, as well as management's beliefs and assumptions and involve a high degree of risk and uncertainty. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Statements that include the words "believes," "anticipates," "plans," "expects." "intends," and similar expressions that convey uncertainty of future events or outcomes are forward-looking statements. Our actual results could differ materially from those discussed or suggested in the forward-looking statements herein. Factors that could cause or contribute to such differences include those described under the heading "Risk Factors" section in this Annual Report on Form 10-K, and in subsequent filings we make with the Securities and Exchange Commission, where we may discuss new risks that have not yet arisen at the time of this Annual Report. In addition, as a result of these and other factors, our past financial performance should not be relied on as an indication of future performance. All forward-looking statements in this document are based on information available to us as of the filing date of this Annual Report on Form 10-K and we assume no obligation to update any forward-looking statements or the reasons why our actual results may differ. All dollar values are expressed in thousands, unless otherwise noted.
Unless the context dictates otherwise, references in this Annual Report on Form 10-K to the “Company,” “we,” “us,” “our,” and similar words are references to The Oncology Institute, Inc., a Delaware corporation (“TOI”), and its consolidated subsidiaries and affiliated entities, as appropriate, including its consolidated variable interest entities (“VIEs”).
Overview
The Company is a leading value-based oncology company that manages community-based oncology practices for the Company and for independent oncology practices that together serve patients at 86 clinic locations across 16 markets and five states throughout the United States. The Company commenced operations in Oregon in October 2024. As of December 31, 2024, our community-based oncology practices are staffed with 130 oncologists and advanced practice providers. 72 of these clinics are staffed with 119 providers employed by our affiliated physician-owned professional corporations, referred to as the "TOI PCs," which provided care for more than 72,000 patients in 2023 and 2024, respectively, and managed a population of approximately 1.9 million patients under value-based agreements as of December 31, 2024. The Company also provides management services to 14 clinic locations owned by independent oncology practices. The Company's mission is to heal and empower cancer patients through compassion, innovation, and state-of-the-art medical care.
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. Many of our services, such as managing clinical trials and palliative care programs, are traditionally accessed through academic and tertiary care settings, while the TOI PCs bring these services to patients in a community setting. As scientific research progresses and more treatment options become available, cancer care is shifting from acute care episodes to chronic disease management. With this shift, it is increasingly important for high-quality, high-value cancer care to be available in a local community setting to all patients in need.
As a value-based oncology company, the Company seeks to deliver both better quality care and lower cost of care for payors and patients. The Company works to accomplish this goal by reducing wasteful, inefficient or counterproductive care that drives up costs but does not improve outcomes. The Company believes payors and employers are aligned with the value-based model due to its enhanced access, improved outcomes, and lower costs. Patients under the Company's affiliated providers’ care can benefit from evidence-based and personalized care plans, gain access to sub-specialized care in convenient community locations, and lower out-of-pocket costs. The Company believes its affiliated providers enjoy the stability and predictability of a large multi-state practice, are not incentivized or pressured to overtreat when it may be inconsistent with a patient’s goals of care, and can focus on practicing outstanding evidence-based medicine, rather than business building.
Components of Results of Operations
Revenue
The Company receives payments from the following sources for services rendered: (i) commercial insurers; (ii) pharmacy benefit managers (“PBMs”), (iii) the federal government under the Medicare program administered by the Centers for Medicare
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and Medicaid Services (“CMS”); (iv) state governments under Medicaid and other programs; (v) other third-party payors and managed care organizations (e.g., risk bearing organizations and independent practice associations (“IPAs”)); and (vi) individual patients and clients.
Revenue primarily consists of capitation revenue, fee-for-service (“FFS”) revenue, dispensary revenue, and clinical trials revenue. Capitation and FFS revenue comprise the revenues within the Company’s patient services segment and are presented together in the results of operations. The following paragraphs provide a summary of the principal forms of our billing arrangements and how revenue is recognized for each type of revenue.
Capitation
Capitation revenues consist primarily of fees for medical services provided by the TOI PCs to the Company's patients under a capitated arrangement with various managed care organizations. Capitation revenue is paid monthly based on the number of enrollees by the contracted managed care organization (per member per month or “PMPM”). Capitation contracts generally have a legal term of one year or longer. Payments in capitation contracts are variable since they primarily include PMPM fees associated with unspecified membership that fluctuates throughout the term of the contract; however, based on our experience, our total underlying membership generally increases over time as penetration of Medicare Advantage products grows. Certain contracts include terms for a capitation deduction where the cost of out-of-network referrals of members are deducted from the future payment. Revenue is recognized in the month services are rendered on the basis of the transaction price established at that time.
Fee-for-service revenue
FFS revenue represents revenue earned under contracts in which we bill and collect for specific medical services rendered by the TOI PCs’ employed physicians. The terms for FFS contracts are short in duration and only last for the period over which services are rendered (typically, one day). FFS revenue consists of fees for medical services provided to patients. As specialist providers, our FFS revenue is dependent on referrals from other physicians, such as primary care physicians. The Company's affiliated providers build trusted, professional relationships with these physicians and their associated medical groups, which can lead to recurring FFS volume; however, this volume is subject to numerous factors the Company cannot control and can fluctuate over time. The Company also receives FFS revenue for capitated patients that receive medical services which are excluded from the Company's capitation contracts. Under the FFS arrangements, third-party payors and patients are billed for patient care services provided by the TOI PCs. Payments for services provided are generally less than billed charges. The Company records revenue net of an allowance for contractual adjustments, which represents the net revenue expected to be collected from third-party payors (including managed care, commercial, and governmental payors such as Medicare and Medicaid), and patients. These expected collections are based on fees and negotiated payment rates in the case of third-party payors, the specific benefits provided for under each patient’s healthcare plan, mandated payment rates in the case of Medicare and Medicaid programs, and historical cash collections (net of recoveries). The recognition of net revenue (gross charges less contractual allowances) from such services is dependent on certain factors, such as the proper completion of medical charts following a patient visit, the forwarding of such charts to our billing center for medical coding and entering into the Company's billing system, and the verification of each patient’s submission or representation at the time services are rendered as to the payor(s) responsible for payment of such services. Revenue is recorded on the date the services are rendered based on the information known at the time of entering of such information into the Company's billing systems as well as an estimate of the revenue associated with medical services.
Dispensary and pharmacy
Oral prescription drugs prescribed by doctors to their patients are sold directly through the TOI PCs’ dispensaries and our newly-acquired pharmacy. Revenue for the prescriptions is based on fee schedules set by various PBMs and other third-party payors. The fee schedule is often subject to direct and indirect remuneration (“DIR”) fees, which are based primarily on pre-established metrics. DIR fees may be assessed in the periods after payments are received against future payments. The Company recognizes revenue, deducted by estimated DIR fees, at the time the patient takes possession of the oral drug.
Clinical trials & other revenue
The TOI PCs also enter into contracts to perform clinical research trials. The terms for clinical trial contracts last many months as the clinical research is performed. Each contract represents a single, integrated set of research activities that are satisfied over time as the output of results from the trial is captured for the trial sponsor to review. Under the clinical trial contracts, the TOI PCs receive a fixed payment for administrative, set-up, and close-down fees; a fixed amount for each patient site visit; and certain expense reimbursements. The Company recognizes revenue for these arrangements on the fees earned to date based on the state of the trial, as established under contract with the customer.
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Operating Expenses
Direct costs - patient services
Direct costs - patient services primarily includes chemotherapy drug costs, clinician salaries and benefits, and medical supplies. Clinicians include oncologists, advanced practice providers such as physician assistants and nurse practitioners, and registered nurses employed by the TOI PCs.
Direct costs - dispensary
Direct costs - dispensary primarily includes the cost of oral medications dispensed in the TOI PCs’ clinic locations.
Direct costs - clinical trials & other
Direct costs - clinical trials & other primarily includes costs related to clinical trial contracts and medical supplies.
Selling, general and administrative expense
Selling, general and administrative expenses include employee-related expenses, including both clinic and field support staff as well as central administrative and corporate staff. These expenses include salaries and related costs and stock-based compensation for our executives and physicians. The Company's selling, general and administrative expenses also includes occupancy costs, technology infrastructure, operations, clinical and quality support, finance, legal, human resources, and business development. Following the consummation of the Business Combination, general and administrative expenses have increased, and the Company expects continued increases over time, due to the additional legal, accounting, insurance, investor relations and other costs that the Company incurs as a public company, as well as other costs associated with continuing to grow the business. While the Company expects its selling, general and administrative expenses to increase in absolute dollars in the foreseeable future. such expenses are on average expected to decrease as a percentage of revenue over the long term.
Results of Operations
The following table sets forth our Consolidated Statements of Operations data expressed as a percentage of total revenues for the periods indicated. The Company’s management is not aware of material events or uncertainties that would cause the financial information below to not be indicative of future operating results or results of future financial condition, although past results should not be relied upon as an indication of future performance or future financial condition.
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| Year Ended December 31, | ||||||
|---|---|---|---|---|---|---|
| 2024 | 2023 | |||||
| Revenue | ||||||
| Patient services | 52.1 | % | 66.0 | % | ||
| Dispensary | 45.7 | % | 32.0 | % | ||
| Clinical trials & other | 2.2 | % | 2.0 | % | ||
| Total operating revenue | 100.0 | % | 100.0 | % | ||
| Operating expenses | ||||||
| Direct costs – patient services | 47.5 | % | 55.8 | % | ||
| Direct costs – dispensary | 38.4 | % | 25.6 | % | ||
| Direct costs – clinical trials & other | 0.3 | % | 0.2 | % | ||
| Goodwill impairment charges | — | % | 5.2 | % | ||
| Selling, general and administrative expense | 27.4 | % | 35.1 | % | ||
| Depreciation and amortization | 1.6 | % | 1.8 | % | ||
| Total operating expenses | 115.2 | % | 123.7 | % | ||
| Loss from operations | (15.2) | % | (23.7) | % | ||
| Other non-operating expense (income) | ||||||
| Interest expense, net | 1.9 | % | 2.1 | % | ||
| Change in fair value of derivative warrant liabilities | (0.2) | % | 0.1 | % | ||
| Change in fair value of earnout liabilities | — | % | (0.2) | % | ||
| Change in fair value of conversion option derivative liabilities | (0.7) | % | (0.3) | % | ||
| Gain on loan forgiveness | — | % | — | % | ||
| Other, net | 0.2 | % | 0.3 | % | ||
| Total other non-operating loss expense | 1.2 | % | 2.0 | % | ||
| Loss before provision for income taxes | (16.4) | % | (25.7) | % | ||
| Income tax benefit | — | % | — | % | ||
| Net loss | (16.4) | % | (25.7) | % |
Comparison of the Years Ended December 31, 2024 and 2023
Revenue
| Year Ended December 31, | Change | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (dollars in thousands) | 2024 | 2023 | $ | % | |||||||||||
| Patient services | $ | 204,883 | $ | 213,504 | $ | (8,621) | (4.0) | % | |||||||
| Dispensary | 179,916 | 103,835 | 76,081 | 73.3 | % | ||||||||||
| Clinical trials & other | 8,613 | 6,900 | 1,713 | 24.8 | % | ||||||||||
| Total operating revenue | $ | 393,412 | $ | 324,239 | $ | 69,173 | 21.3 | % |
Patient services
The decrease in patient services revenue was primarily due to a 5.0% decrease in FFS revenue and a 1.3% decrease in capitation revenue as a result of a terminated contract during the year, partially offset by other contract starts.
Dispensary
The increase in dispensary revenue was primarily due to a 85.9% increase in the number of fills offset by 6.8% decrease in the average revenue per fill.
Clinical trials & other
For the year ended December 31, 2024, the increase in clinical trials and other revenue was primarily due to an increase in other revenue compared to the prior year.
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Operating Expenses
| Year Ended December 31, | Change | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (dollars in thousands) | 2024 | 2023 | $ | % | |||||||||
| Direct costs – patient services | $186,880 | $ | 181,017 | $ | 5,863 | 3.2 | % | ||||||
| Direct costs – dispensary | 151,231 | 83,071 | 68,160 | 82.1 | % | ||||||||
| Direct costs – clinical trials & other | 1,304 | 578 | 726 | 125.6 | % | ||||||||
| Goodwill impairment charges | 0 | 16,867 | (16,867) | N/A | |||||||||
| Selling, general and administrative expense | 107,828 | 113,851 | (6,023) | (5.3) | % | ||||||||
| Depreciation and amortization | 6,287 | 5,873 | 414 | 7.0 | % | ||||||||
| Total operating expenses | $453,530 | $ | 401,257 | $ | 52,273 | 13.0 | % |
Patient services cost
The increase in patient services cost was primarily due to a 13.9% increase in clinical payroll costs due to the expectation of growth from additional contracts, partially offset by a 0.4% decrease in intravenous drug costs, primarily driven by the Company's patient mix and volume.
The increase in dispensary cost was primarily due to a 85.9% increase in the number of prescriptions filled offset by a 2.1% decrease in the average cost of the prescriptions filled.
Goodwill impairment charges
During the years ended December 31, 2024 and 2023, impairment charges of $0 and $16,867 were recorded related to goodwill, respectively. See Note 2 and Note 18 in Item. 8 Financial Statements and Supplementary Data for additional detail.
Selling, general and administrative expense
The decrease in selling, general and administrative expense was primarily driven by a 5.6% decrease in share-based compensation expense, a 2.1% decrease in non-clinical payroll, a 2.2% decrease in insurance expense, and a 1.5% decrease in deferred purchase price expense offset by a 2.2% increase in professional fees, a 1.6% increase in real estate and equipment expenses and a 5.1% increase in office expenses and supplies due to the growth in the Company's management and corporate teams.
Other Non-Operating Expenses (Income)
| Year Ended December 31, | Change | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (dollars in thousands) | 2024 | 2023 | $ | % | |||||||||||
| Interest expense, net | $ | 7,496 | $ | 6,777 | $ | 719 | 10.6 | % | |||||||
| Change in fair value of derivative warrant liabilities | (619) | 286 | (905) | (316.4) | % | ||||||||||
| Change in fair value of earnout liabilities | — | (803) | 803 | (100.0) | % | ||||||||||
| Change in fair value of conversion option derivative liabilities | (2,697) | (878) | (1,819) | N/A | |||||||||||
| Other, net | 365 | 704 | (339) | (48.2) | % | ||||||||||
| Total other non-operating expense | $ | 4,545 | $ | 6,086 | $ | (1,541) | (25.3) | % |
Interest expense
The increase in interest expense was primarily the result of interest and amortization related to the Senior Secured Convertible Notes issued during the year ended December 31, 2024.
Change in fair value of liabilities
The decrease in non-operating (income) expense was primarily due to the decrease in gains of $803 and $1,819, respectively during the year ended December 31, 2024, as a result of decreases in the fair value of earnout liabilities and conversion option derivative liabilities, which were created as part of the Business Combination and the issuance of the Senior Secured Convertible Note, respectively.
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Key Business Metrics
In addition to our financial information, the Company's management reviews a number of operating and financial metrics, including the following key metrics, to evaluate our business, measure our performance, identify trends affecting our business, formulate business plans, and make strategic decisions.
| Year Ended December 31, | |||||||
|---|---|---|---|---|---|---|---|
| 2024 | 2023 | ||||||
| Clinics (1) | 86 | 83 | |||||
| Markets | 16 | 15 | |||||
| Lives under value-based contracts (millions) | 1.9 | 1.8 | |||||
| Net loss | $ | (64,663) | $ | (83,068) | |||
| Adjusted EBITDA (in thousands) (2) | $ | (35,688) | $ | (25,805) |
(1) Includes independent oncology practices to which we provide limited management services, but do not bear the operating costs.
(2) Adjusted EBITDA is a "non-GAAP" financial measure within the meaning of Item 10 of Regulation S-K promulgated by the SEC. The Company defines Adjusted EBITDA as net income (loss) adjusting for:
•Depreciation and amortization,
•Interest expense, net,
•Tax payments and penalties,
•Non-cash addbacks,
•Share-based compensation,
•Goodwill impairment charges,
•Changes in fair value of liabilities,
•Unrealized (gains) losses on investments
•Practice acquisition-related costs,
•Post combination compensation expense,
•Consulting and legal fees,
•Infrastructure and workforce costs, and
•Transaction costs.
The Company includes Adjusted EBITDA because it is an important measure which our management uses to assess the results of operations, to evaluate factors and trends affecting the business, and to plan and forecast future periods.
Management believes that this measure provides an additional way of viewing aspects of the Company's operations that, when viewed with the GAAP results, provides a more complete understanding of the Company's results of operations and the factors and trends affecting the business. However, non-GAAP financial measures should be considered a supplement to, and not as a substitute for, or superior to, the corresponding measures calculated in accordance with U.S. GAAP. Non-GAAP financial measures used by management may differ from the non-GAAP measures used by other companies, including the Company's competitors. Management encourages investors and others to review the Company's financial information in its entirety, not to rely on any single financial measure.
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The following tables provide a reconciliation of net loss, the most closely comparable GAAP financial measure, to Adjusted EBITDA:
| Year Ended December 31, | Change | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (dollars in thousands) | 2024 | 2023 | $ | % | ||||||||||
| Net loss | $ | (64,663) | $ | (83,068) | $ | 18,405 | (22.2) | % | ||||||
| Depreciation and amortization | 6,287 | 5,873 | 414 | 7.0 | % | |||||||||
| Interest expense, net | 7,496 | 6,777 | 719 | 10.6 | % | |||||||||
| Tax payments and penalties | (32) | (36) | 4 | (11.1) | % | |||||||||
| Non-cash addbacks(1) | (139) | 2,029 | (2,168) | (106.9) | % | |||||||||
| Share-based compensation | 11,152 | 17,548 | (6,396) | (36.4) | % | |||||||||
| Goodwill impairment charges | — | 16,867 | (16,867) | N/A | ||||||||||
| Change in fair value of liabilities | (3,316) | (1,395) | (1,921) | 137.7 | % | |||||||||
| Unrealized (gains) losses on investments | (133) | (237) | 104 | N/A | ||||||||||
| Practice acquisition-related costs(2) | — | 113 | (113) | (100.0) | % | |||||||||
| Post-combination compensation expense(3) | 374 | 2,048 | (1,674) | N/A | ||||||||||
| Consulting and legal fees(4) | 841 | 1,570 | (729) | (46.4) | % | |||||||||
| Infrastructure and workforce costs(5) | 6,427 | 5,965 | 462 | 7.7 | % | |||||||||
| Transaction costs(6) | 18 | 141 | (123) | (87.2) | % | |||||||||
| Adjusted EBITDA | $ | (35,688) | $ | (25,805) | $ | (9,883) | 38.3 | % |
(1) During the year ended December 31, 2024, non-cash addbacks were primarily comprised of non-cash rent of $411 and $259 loss on disposal of fixed assets. During the year ended December 31, 2023, non-cash addbacks were primarily comprised of a $2,020 of net bad debt write-off.
(2) Practice acquisition-related costs were comprised of consulting and legal fees incurred to perform due diligence, execute, and integrate acquisitions of various oncology practices.
(3) Deferred consideration payments for practice acquisitions that are contingent upon the seller’s future employment at the Company.
(4) Consulting and legal fees were comprised of a subset of the Company’s total consulting and legal fees during the years ended December 31, 2024 and 2023, and related to certain advisory projects, software implementations, and legal fees for debt financing and predecessor litigation matters.
(5) Infrastructure and workforce costs were primarily comprised of recruiting expenses to build out corporate infrastructure of $1,294 and $2,227, severance expenses resulting from cost rationalization programs of $343 and $979, temporary labor of $748 and $1,365, and lease terminations, settlements, and penalty addbacks of $3,921 and $1,289 during the years ended December 31, 2024 and 2023, respectively.
(6) Transaction costs were comprised of consulting and legal fees associated with non-recurring due diligence projects during the year ended December 31, 2024, and related to consulting, legal, administrative and regulatory fees associated with share repurchases and practice acquisitions during the year ended December 31, 2023.
Liquidity and Capital Resources
General
The accompanying financial statements have been prepared on a going concern basis of accounting, which contemplates continuity of operations, realization of assets and liabilities and commitments in the normal course of business. In connection with the preparation of the consolidated financial statements for the year ended December 31, 2024, the Company conducted an evaluation as to whether there were conditions and events, considered in the aggregate, which raised substantial doubt as to its ability to continue as a going concern within one year after the date of the issuance of such financial statements. The Company had cash and cash equivalents of $49,669 and an accumulated deficit of $210,813 at December 31, 2024, and a net loss of $64,663 and net cash used in operating and investing activities of $26,538 for the year ended December 31, 2024. In February 2025, the Company entered into an Amendment to the Facility Agreement (see Note 11 - Debt) in which the Company made a partial prepayment of approximately $20 million together with accrued and unpaid interest. Among other items, the Amendment provided for the removal of the financial covenant that required the Company to hold at least $40 million of cash
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and cash equivalents (see Note 22 — Subsequent Events). Additionally, in March 2025, the Company entered into a securities purchase agreement for a private placement that resulted in gross proceeds of approximately $16.5 million, before deducting placement agent fees and offering expenses. Additionally, the Company's lender and existing investor, entered into an exchange agreement, in which approximately $4.1 million aggregate principal amount of the Company's senior secured convertible notes would be exchanged for common-equivalent preferred stock and warrants for common stock.
The Company has also taken a number of other actions to increase cash flow. As one of our strategic priorities in 2024 and beyond, the Company implemented an initiative to eliminate cash burn. Due to efforts towards working capital management that saw improvements across receivables, inventory, and payables, the Company was able to generate a positive cash flow from operations in Q4 2024 of approximately $4 million. Additionally, we generated an 11% reduction in SG&A expenses compared to the prior year directly as a result of our ongoing efforts to streamline operations, improve efficiency, and optimize our overhead resourcing.
Accordingly, the Company has concluded that it will have sufficient liquidity to fund its operations for at least one year from the date these consolidated financial statements are issued.
Although the Company currently expects its sources of capital to be sufficient to meet its near-term liquidity needs, there can be no assurance that such sources will be sufficient to satisfy its liquidity requirements in the future. If the Company cannot generate or obtain needed funds, it might be forced to make substantial reductions in its operating and capital expenses or pursue restructuring plans, which could adversely affect its business operations and ability to execute its current business strategy.
Cash Flows
The following table presents a summary of the Company's consolidated cash flows from operating, investing, and financing activities for the periods indicated.
| Year Ended December 31, | Change | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (dollars in thousands) | 2024 | 2023 | $ | % | ||||||||||
| Net cash and cash equivalents used in operating activities | $ | (26,538) | $ | (36,315) | $ | 9,777 | (26.9) | % | ||||||
| Net cash and cash equivalents provided by investing activities | 46,211 | 62,640 | (16,429) | (26.2) | % | |||||||||
| Net cash and cash equivalents used in financing activities | (3,492) | (6,847) | 3,355 | (49.0) | % | |||||||||
| Net increase in cash and cash equivalents | $ | 16,181 | $ | 19,478 | $ | (3,297) | (16.9) | % | ||||||
| Cash and cash equivalents at beginning of period | 33,488 | 14,010 | 19,478 | 139.0 | % | |||||||||
| Cash and cash equivalents at end of period | $ | 49,669 | $ | 33,488 | $ | 16,181 | 48.3 | % |
Operating Activities
Significant changes impacting net cash and cash equivalents used in operating activities for the year ended December 31, 2024 as compared to the year ended December 31, 2023 were as follows:
•Net loss decreased of $18,405, primarily as a result of a $16,900 reduction of operation loss and a $1,921 decrease in the fair value of warrant, earnout and conversion option liabilities of for the year ended December 31, 2024 as compared to the year ended December 31, 2023;
•Cash used by accounts receivable increased $1,411 for the year ended December 31, 2024 as compared to the year ended December 31, 2023 due to new contract wins and therefore more services being provided and billed.
•Cash provided by accounts payable and accrued expenses increased $10,527 for the year ended December 31, 2024 as compared to the year ended December 31, 2023 primarily due to an increase in vendor payables resulting from the growth in the Company's business and strategic cash management;
•Cash used by purchasing inventory decreased $8,024 for the year ended December 31, 2024 as compared to the year ended December 31, 2023 as a result of favorable payment terms with suppliers and improved inventory management;
•Cash provided by prepaid and other current assets decreased $1,952 for the year ended December 31, 2024 as compared to the year ended December 31, 2023.
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Investing Activities
Net cash provided by investing activities decreased $16,429 for the year ended December 31, 2024 as compared to the year ended December 31, 2023 due to the decrease in sale of marketable securities of $31,258, offset by $9,595 reduction in purchases of marketable securities, and a decrease in cash used for purchases of practice acquisitions and intangibles of $4,456.
Financing Activities
Net cash used by financing activities decreased $3,355 for the year ended December 31, 2024 as compared to the year ended December 31, 2023 primarily due to a $1,019 decrease in the common stock repurchase that was done in the prior year, and a $2,113 decrease in finance insurance premium payments during year ended December 31, 2024.
Material Cash Requirements
The Company's material cash requirements for the following five years consist of principal and interest due on the convertible note, operating leases and other miscellaneous items. Additionally, the Company is subject to certain outside claims and litigation arising out of the ordinary course of business, however, no such litigation requires future cash expenditure as of December 31, 2024.
| Material Cash Requirements Due by the Year Ended December 31, | |||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (dollars in thousands) | 2025 | 2026-2027 | 2028-2029 | Thereafter | Total | ||||||||||||||
| Convertible note1 | $ | 4,461 | $ | 117,125 | $ | — | $ | — | $ | 121,586 | |||||||||
| Operating leases | 8,467 | 14,961 | 8,221 | 3,556 | 35,205 | ||||||||||||||
| Deferred acquisition and contingent consideration | 225 | — | — | — | 225 | ||||||||||||||
| Other2 | 840 | 68 | — | — | 908 | ||||||||||||||
| Total material cash requirements | $ | 13,993 | $ | 132,154 | $ | 8,221 | $ | 3,556 | $ | 157,924 |
(1) Includes principal and interest payments due.
(2) Other is comprised of finance leases and D&O financing
JOBS Act
The Company qualifies as an “emerging growth company,” as defined in Section 2(a) of the 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. 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 our financial statements with another public company that 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.
Critical Accounting Policies and Estimates
Our management’s discussion and analysis of financial condition and results of operations is based on our financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States, or U.S. GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported expenses during the reporting periods. These items are monitored and analyzed by us for changes in facts and circumstances, and material changes in these estimates could occur in the future. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Changes in estimates are reflected in reported results for the period in which they become known. Actual results may differ significantly from these estimates under different assumptions or conditions.
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Our significant accounting policies are more fully described in the notes to our audited consolidated financial statements elsewhere in this Annual Report on Form 10-K. We believe that the following accounting policies reflects the most critical judgments and estimation uncertainty used in the preparation of our Consolidated Financial Results.
Variable Interest Entities
The Company consolidates entities for which it has a variable interest and is determined to be the primary beneficiary. The Company holds variable interests in the TOI PCs, comprised of The Oncology Institute CA, a Professional Corporation (“TOI CA”) and The Oncology Institute FL, LLC (“TOI FL”) and The Oncology Institute TX, a Professional Association ("TOI TX"), all of which the Company cannot legally own due to jurisdictional laws governing the corporate practice of medicine. The TOI PCs employ physicians and other clinicians in order to provide professional services to patients of our managed clinics, and under substantially similar management services agreements, or MSAs, we serve as the exclusive manager and administrator of the TOI PCs’ non-medical functions and services. The TOI PCs are considered variable interest entities (“VIEs”) as they do not have sufficient equity to finance their activities without additional financial support from the Company. An enterprise having a controlling financial interest in a VIE must consolidate the VIE if it has both power and benefits — that is, it has (1) the power to direct the activities of a VIE that most significantly impacts the VIE’s economic performance (power), and (2) the obligation to absorb the losses of the VIE that potentially could be significant to the VIE or the right to receive benefits from the VIE that potentially could be significant to the VIE (benefits). The Company has the power to control all financial activities of the TOI PCs, the rights to receive substantially all benefits from the VIEs, and consequently consolidates the TOI PCs. Revenues, expenses, and income from the TOI PCs are included in the consolidated amounts as presented on the Consolidated Statements of Operations.
Segment Reporting
The Company presents the financial statements by segment in accordance with the relevant accounting literature to provide investors with transparency into how the chief operating decision maker (“CODM”) manages the business. The Company's CODM is our Chief Executive Officer. The CODM reviews financial information and allocates resources across three operating segments: dispensary, patient services, and clinical trials & other.
Revenue Recognition
The Company recognizes consolidated revenue based upon the principle of the transfer of control of our goods and services to customers in an amount that reflects the consideration it expects to be entitled. This principle is achieved through applying the following five-step approach:
1.Identification of the contract, or contracts, with a customer.
2.Identification of the performance obligations in the contract.
3.Determination of the transaction price.
4.Allocation of the transaction price to the performance obligations in the contract.
5.Recognition of revenue when, or as, the entity satisfies a performance obligation.
Consolidated revenue primarily consists of capitation revenue, fee-for-service (FFS) revenue, dispensary revenue, and clinical trials revenue. Revenue is recognized in the period in which services are rendered or the period in which the TOI PCs are obligated to provide services. The form of billing and related risk of collection for such services may vary by type of revenue and the payor. The following paragraphs provide a summary of the principal forms of billing arrangements and how revenue is recognized for each.
Capitation
Capitation contracts have a single performance obligation that is a stand ready obligation to perform specified healthcare services to the population of enrolled members and constitutes a series for the provision of managed healthcare services for the term of the contract, which is deemed to be one month since the mix of patient-customers can and do change month over month. The transaction price for capitation contracts is variable as it primarily includes PMPM fees associated with unspecified membership that fluctuates throughout the term of the contract. Further, we adjust the transaction price for capitation deductions based on historical experience. Revenue is recognized in the month services are rendered on the basis of the transaction price established at that time. If subsequent information resolves uncertainties related to the transaction price, adjustments will be
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recognized in the period they are resolved. When payment has been received but services have not yet been rendered, the payment is recognized as a contract liability.
Fee For Service
FFS revenue consists of fees for medical services actually provided to patients. These medical services are distinct since the patient can benefit from the medical services on their own. Each service constitutes a single performance obligation for which the patient accepts and receives the benefit of the medical services as they are performed.
The transaction price from FFS arrangements is variable in nature because fees are based on patient encounters, credits due to patients, and reimbursement of provider costs, all of which can vary from period to period. The Company estimates the transaction price using the most likely methodology and amounts are only included in the net transaction price to the extent that it is probable that a significant reversal of cumulative revenue will not occur once any uncertainty is resolved. As a practical expedient, the Company adopted a portfolio approach to determine the transaction price for the medical services provided under FFS arrangements. Under this approach, the Company bifurcated the types of services provided and grouped health plans with similar fees and negotiated payment rates.
At these levels, portfolios share the characteristics conducive to ensuring that the results do not materially differ from the standard applied to individual patient contracts related to each medical service provided.
Revenue is recorded on the date the services are rendered based on the information known at the time of entering of such information into our billing systems as well as an estimate of the revenue associated with medical services. When the performance obligation is not satisfied, the billing is recognized as a contract liability.
Dispensary
Dispensed prescriptions that are filled and delivered to the patient are considered a distinct performance obligation. The transaction price for the prescriptions is based on fee schedules set by PBMs and other third-party payors. The fee schedule is often subject to DIR fees, which are based primarily on pre-established metrics. DIR fees may be assessed in periods after payments are received against future payments. The Company estimates DIR fees to arrive at the transaction price for prescriptions. Revenue is recognized based on the transaction at the time the patient takes possession of the oral drug.
Clinical Research & Other
Clinical research contracts represent a single, integrated set of research activities and thus are a single performance obligation. The performance obligation is satisfied over time as the output is captured in data and documentation that is available for the customer to consume over the course of arrangement and furthers progress of the clinical trial. The Company has elected to recognize revenue for clinical trials using the ‘as-invoiced’ practical expedient. The customer is invoiced periodically based on the progress of the trial such that each invoice captures the revenue earned to date based on the state of the trial as established under contract with the customer.
Income Taxes
The Company uses the asset and liability method of accounting for income taxes. Deferred tax assets and liabilities are determined based on temporary differences between the financial carrying amounts and the tax basis of assets and liabilities using enacted tax rates in effect in the years in which the temporary differences are expected to reverse.
A valuation allowance is required when there is significant uncertainty as to whether certain deferred tax assets can be realized. The ability to realize deferred tax assets is dependent upon our ability to generate sufficient taxable income within the
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carryforward periods provided for in the tax law for each tax jurisdiction. We have considered the following possible sources of taxable income when assessing the realization of our deferred tax assets:
•future reversals of existing taxable temporary differences;
•future taxable income or loss, exclusive of reversing temporary differences and carryforwards;
•tax-planning strategies; and
•taxable income in prior carryback years.
We will continue to reevaluate the continued need for a valuation allowance. Relevant factors include:
•current financial performance;
•our ability to meet short-term and long-term financial and taxable income projections;
•the overall market environment; and
•the volatility and trends in the industry in which we operate.
Goodwill and Intangible Assets
The Company accounts for goodwill and intangible assets under Accounting Standards Codification Topic No. 350, Goodwill and Other (“ASC 350”). Goodwill represents the excess of the fair value of the consideration conveyed in acquisition over the fair value of net assets acquired.
Goodwill is not amortized but is required to be evaluated for impairment at the same time every year. The Company performs annual testing of impairment for goodwill in the fourth quarter of each year or earlier if potential impairment indicators exist. When impairment indicators are identified, the Company compares the reporting unit’s fair value to its carrying amount, including goodwill. An impairment loss is recognized as the difference, if any, between the reporting unit’s carrying amount and its fair value to the extent the difference does not exceed the total amount of goodwill allocated to the reporting unit.
Under ASC 350, finite-lived intangible assets are stated at acquisition-date fair value. Intangible assets are amortized using the straight-line method.
Finite-lived intangible assets are stated at acquisition-date fair value. Intangible assets are amortized using the straight-line method. Finite-lived intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. When circumstances indicate that recoverability may be impaired, the Company assesses its ability to recover the carrying value of the asset group from the expected future pre-tax cash flows (undiscounted and without interest charges) of the related operations. If these cash flows are less than the carrying value of such asset, an impairment loss is recognized for the difference between estimated fair value and carrying value. Fair value is determined based on appropriate valuation techniques.
Recent Accounting Pronouncements
For information regarding recent accounting pronouncements, refer to Note 2 of our consolidated financial statements included in this Annual Report on Form 10-K.