Nutex Health Inc.: Form 10-Q for the period ended Mar 31, 2023

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the unaudited consolidated financial statements and the notes thereto included in Part I, Item 1, “Financial Statements” of this Quarterly Report on Form 10-Q.

Explanatory Note

On April 1, 2022 (the “Merger Date”), Nutex Health Holdco LLC and Clinigence Holdings, Inc. (“Clinigence”) completed the merger (the “Merger”) contemplated by the Agreement and Plan of Merger (the “Merger Agreement”) dated as of November 23, 2021 between Clinigence, Nutex Acquisition LLC, a Delaware limited liability company and wholly-owned subsidiary of Clinigence, Nutex, Micro Hospital Holding LLC (solely for the purposes of certain sections of the Merger Agreement), Nutex Health Holdco LLC and Thomas Vo, M.D., solely in his capacity as the representative of the equity holders of Nutex. Immediately following the completion of the Merger, Clinigence amended its certificate of incorporation and bylaws to change its name to “Nutex Health Inc.” In connection with the Merger, each outstanding equity interest of Nutex Health Holdco LLC was exchanged for 3.571428575 shares of Clinigence common stock. The Merger was accounted for as a reverse business combination under U.S. GAAP. Therefore, Nutex Health Holdco LLC was treated as the accounting acquirer in the Merger. Our financial statements presented for periods prior to the Merger Date are those of Nutex Health Holdco, LLC, as the Company’s predecessor entity. Beginning with the second quarter of 2022, our financial statements are presented on a consolidated basis and include Clinigence.

Except where the context indicates otherwise, (i) references to “we,” “us,” “our,” or the “Company” refer, for periods prior to the completion of the Merger, to Nutex Health Holdco LLC and its subsidiaries, (ii) references the “Nutex Health” for periods following the completion of the Merger, refer to Nutex Health Inc. and its subsidiaries and (ii) references to “Clinigence” refer to Clinigence Holdings, Inc. and its subsidiaries prior to the completion of the Merger.

Overview

Nutex Health Inc. is a physician-led, healthcare services and operations company with 19 hospital facilities in eight states (hospital division), and a primary care-centric, risk-bearing population health management division. Our hospital division implements and operates different innovative health care models, including micro-hospitals, specialty hospitals and hospital outpatient departments (“HOPDs”). The population health management division owns and operates provider networks such as independent physician associations (“IPAs”) and offers a cloud-based proprietary technology platform to IPAs which aggregates clinical and claims data across multiple settings, information systems and sources to create a holistic view of patients and providers.

We employ approximately 1200 full time employees and partner with over 900 physicians. Our corporate headquarters is based in Houston, Texas. We were incorporated on April 13, 2000 in the state of Delaware.

Our financial statements present the Company’s consolidated financial condition and results of operations including those of majority-owned subsidiaries and variable interest entities (“VIEs”) for which we are the primary beneficiary.

The hospital division includes our healthcare billing and collections organization and hospital entities. In addition, we have financial and operating relationships with multiple professional entities (the “Physician LLCs”) and real estate entities (the “Real Estate Entities”). The Physician LLCs employ the doctors who work in our hospitals. These entities are consolidated by the Company as VIEs because they do not have significant equity at risk, and we have historically provided support to the Physician LLCs in the event of cash shortages and received the benefit of their cash surpluses.

The Real Estate Entities own the land and hospital buildings which are leased to our hospital entities. The Real Estate Entities have mortgage loans payable to third parties which are collateralized by the land and buildings. We consolidate the Real Estate Entities as VIEs in instances where our hospital entities are guarantors or co-borrowers under their outstanding mortgage loans. Since the second quarter of 2022, we deconsolidated 18 Real Estate Entities after the third-party lenders released our guarantees of associated mortgage loans.

The Company has no direct or indirect ownership interest in the Physician LLCs or Real Estate Entities, so 100% of the equity for these entities is shown as noncontrolling interest in the consolidated balance sheets and statements of operations.

The population health management division includes our management services organizations and a healthcare information technology company providing a cloud-based platform for healthcare organizations. In addition, AHISP, IPA, a physician-affiliated entity that is not owned by us—is consolidated as a VIE of our wholly-owned subsidiary AHP since we are the primary beneficiary of their operations under AHP’s management services contracts with them.

Sources of revenue. Our hospital division recognizes net patient service revenue for contracts with patients and in most cases a third-party payor (commercial insurance, workers compensation insurance or, in limited cases, Medicare/Medicaid).

We receive payment for facility services rendered by us from federal agencies, private insurance carriers, and patients. The Physician LLCs receive payment for doctor services from these same sources. On average, greater than 90% of our net patient service revenue are paid by insurers, federal agencies, and other non-patient third parties. The remaining revenues are paid by our patients in the form of copays, deductibles, and self-payment. The following tables present the allocation of the estimated transaction price with the patient between the primary patient classification of insurance coverage:

The population health management division recognizes revenue for capitation and management fees for services to IPAs and physician groups and for the licensing, training, and consulting related to our cloud-based proprietary technology. Capitation revenue consists primarily of capitated fees for medical services provided by physician-owned entities we consolidate as VIEs. Capitated arrangements made directly with various managed care providers including HMOs. Capitation revenues are typically prepaid monthly to us based on the number of enrollees selecting us as their healthcare provider. Capitation is a fixed payment amount per patient per unit of time paid in advance for the delivery of health care services, whereby the service providers are generally liable for excess medical costs. We receive management fees that are received based on gross capitation revenues of the IPAs or physician groups we manage.

Our growth plans. We plan to expand our operations by entering new market areas either through development of new hospitals, formation of new IPAs or by making acquisitions.

We identify new market areas for hospitals based on the area’s need for access to emergency health services and growth expectations. We identify and partner with local physicians who will operate and manage the new location. When developing new hospitals, we have a turn-key process for location selection, real estate acquisition, design, ‎and development of the facility including staffing, training and operations. We extend our existing comprehensive suite of ‎centralized services to operating hospitals, including executive management, billing, collections, recruiting ‎and marketing.

Overview of Legislative Developments

The U.S. Congress and many state legislatures have introduced and passed a large number of proposals and legislation designed to make major changes in the healthcare system, including changes that have impacted access to health insurance. The most prominent of these efforts, the Affordable Care Act, affects how healthcare services are covered, delivered and reimbursed. The Affordable Care Act increased health insurance coverage through a combination of public program expansion and private sector health insurance reforms. There is uncertainty regarding the ongoing net effect of the Affordable Care Act due to the potential for continued changes to the law’s implementation and its interpretation by government agencies and courts. There is also uncertainty regarding the potential impact of other health reform efforts at the federal and state levels.

In response to the COVID-19 pandemic, federal and state governments passed legislation, promulgated regulations, and have taken other administrative actions intended to assist healthcare providers in providing care to COVID-19 and other patients during the public health emergency and to provide financial relief. Among these, the *Coronavirus Aid, Relief, and Economic Security Act (“*CARES Act”) had the most impact on our business.

The CARES Act included a waiver of insurance copayments, coinsurance, and annual deductibles for laboratory tests to diagnose COVID-19 and visits to diagnose COVID-19 at an emergency department of a hospital. These provisions of the CARES Act expired on June 30, 2021. While these provisions were effective, we experienced higher levels of revenue due to a shift of payor mix. The larger number and acuity of patient claims for COVID-19 also resulted in higher revenue.

No Surprises Act

The No Surprises Act (“NSA”) is a federal law that took effect January 1, 2022, to protect consumers from most instances of “surprise” balance billing. The legislation was included in the Consolidated Appropriations Act, 2021, which was passed by Congress and signed into law by President Trump on December 27, 2020. With respect to the Company, ‎the NSA limits the amount an insured patient will pay for emergency services furnished by an out-of-network ‎provider. The NSA addresses the payment of these out-of-network providers by group health plans or health ‎insurance issuers (collectively, “insurers”). In particular, the NSA requires insurers to reimburse out-of-network ‎providers at a statutorily calculated “out-of-network rate.” In states without an all-payor model agreement or ‎specified state law, the out-of-network rate is either the amount agreed to by the insurer and the out-of-network ‎provider or an amount determined through an independent dispute resolution (“IDR”) process. ‎

Under the NSA, insurers must issue an initial payment or notice of denial of payment to a provider within ‎thirty days after the provider submits a bill for an out-of-network service. If the provider disagrees with the ‎insurer’s determination, the provider may initiate a thirty-day period of open negotiation with the insurer over the ‎claim. If the parties cannot resolve the dispute through negotiation, the parties may then proceed to IDR ‎arbitration. ‎

Independent Dispute Resolution. The provider and insurer each submits a proposed payment amount and ‎explanation to the arbitrator. The arbitrator must select one of the two proposed payment amounts taking into ‎account the “qualifying payment amount” and additional circumstances including among other things the level of training, outcomes ‎measurements of the facility, the acuity of the individual treated, and the case mix and scope of services of the ‎facility providing the service. The NSA prohibits the arbitrator from considering the provider’s usual and ‎customary charges for an item or service, or the amount the provider would have billed for the item or service in ‎the absence of the NSA. ‎

Qualifying Payment Amount. The “qualifying payment amount” is generally “the median of the contracted ‎rates recognized by the plan or issuer under such plans or coverage, respectively, on January 31, 2019, for the ‎same or a similar item or service that is provided by a provider in the same or similar specialty and provided in the ‎geographic region in which the items or service is furnished,” with annual increases based on the consumer price ‎index. In other words, the qualifying payment amount is typically the median rate the insurer would have paid for ‎the service if provided by an in-network provider or facility.‎

HHS Final Rule. As required by the NSA, the United States Department of Health and Human ‎Services (“HHS”) has established an IDR process under which a certified IDR ‎entity determines the ultimate amount of payment. The HHS’ final rule became effective October 25, 2022. The final rule eliminated the rebuttable presumption that the qualified payment amount is the correct price and also abandoned the requirement that the certified IDR entity must select the offer closest to the qualifying payment amount. These key provisions were initially part of the interim rule issued in 2021 and were challenged by several court cases. Under the final rule, the certified IDR entity must instead select the offer that best reflects the value of the item or service provided, by first considering the QPA and then considering “additional information” that is relevant to the dispute.

Since the NSA became effective January 1, 2022, our average payment by insurers of patient claims for emergency services has declined by approximately 30%. In our experience, insurers often initially pay amounts lower than the QPA without regard for other information relevant to the claim. This requires us to make more appeals using the IDR process. While we are working within the established processes for IDR, we have had varying successes at achieving collections higher than the established QPA.

On March 17, 2023, the Centers for Medicare & Medicaid Services (“CMS”) issued new guidance (“Guidance”) applicable to the independent dispute resolution (“IDR”) process in the NSA effective for payment determinations made on or after February 6, 2023 for items and services furnished on or after October 25, 2022 for plan years (in the individual market, policy years) beginning on or after January 1, 2022. The revisions were put in place to help balance the arbitration process by including the recent Texas Medical Association Court Order and removing “double counting” provisions. From now on, independent arbiters must consider all evidence given to them by the disputing parties, and not just the Qualified Payment Amount (QPA).

Under the Guidance, Certified IDR Entities now must consider:

• QPA(s) for the applicable year for the qualified IDR item or service; and
• other information submitted by a party as long as it does not contain prohibited factors.

Generally, parties may submit additional information regarding any of the circumstances of the services provided. Under the Guidance, the certified IDR entity now must consider all information submitted to determine the appropriate payment rate. Previously, there was a rebuttable presumption that the QPA was the appropriate payment amount, and the IDR entity was not required to consider any additional factors. This news comes as a major win for Nutex Health and other providers’ quest to make the arbitration process more equitable and straightforward.

After being suspended for services rendered after October 25, 2022, IDR entities have been instructed to resume payments. Now that the IDR process is reopened for all claims, arbiters can start making headway on the backlog.

We are supportive of industry efforts seeking to amend the NSA final rule. Our experience, like that of many other healthcare providers, is that the final rule continues to unfairly favor insurers in the determination of the QPA we receive for our healthcare services. It is difficult to predict the outcome of efforts to challenge or amend the final rule. As well, there can be no assurance that third-party payors will not attempt to further reduce the rates they pay for our services or that additional rules issued under the NSA will not have adverse consequences to our business.

Results of Operations

We report the results of our operations as three segments in our consolidated financial statements: (i) the hospital division, (ii) the population health management division and (ii) the real estate division. Activity within our business segments is significantly impacted by demand for healthcare services we provide, competition for these services in each of the market areas we serve, and the legislative changes discussed above.

Three Months Ended March 31, 2023 Compared to Three Months Ended March 31, 2022

We reported a net loss attributable to Nutex Health Inc. of $5.1 million, or a loss of $0.01 per share, for the three months ended March 31, 2023 as compared with net income attributable to Nutex Health Inc. of $21.4 million, or $0.04 per diluted share, for same period of 2022. Our 2023 results were principally affected by:

• Lower patient visits, decreasing by 36% during the three months ended March 31, 2023 as compared with the same period of 2022 due mostly to increased Covid visits in January 2022;
• Issuance in March 2023 of 1,000,000 common shares for total expense of $1.9 million to Apollo Medical Holdings, Inc. for IPA managerial services; and
• Higher overall cost of employees and independent contractors.

Adjusted EBITDA for the three months ended March 31, 2023 was $2.4 million as compared to $24.2 million for the comparable period of 2022. Refer to Non-GAAP Financial Measures discussed below for a definition and reconciliation of Adjusted EBITDA. The items affecting revenue and start-up costs contributed significantly to the decline in Adjusted EBITDA in the 2023 period.

A discussion of our segment results is included below.

Hospital Division. Our revenue for the three months ended March 31, 2023 totaled $49.3 million as compared to $79.1 million for the same period of 2022, a decrease of 38% caused by a reduction in both collection amounts and the number of patient visits.

The following table shows the number of patient visits during the periods:

Total patient visits decreased 36% during the three months ended March 31, 2023 as compared with the same period of 2022. Patient visits in the 2022 period included significant volumes of COVID-19 related cases.

The hospital division’s operating income was $4.8 million during the three months ended March 31, 2023, down as compared with income of $35.8 million in the same period of 2022, a decrease of 86.6%. Our operating income for the first quarter of 2023 was adversely affected by the reduction in net revenue discussed above. Additionally, we have made professional staffing additions in line with our operations.

Population Health Management Division. We completed our reverse business combination with Clinigence in April 2022. Clinigence's operations are reported as the population health management division. Our total revenue for the three months ended March 31, 2023 was $7.0 million consisting of capitation revenue of $6.0 million, management fees of $0.7 million and SaaS revenue of $0.3 million. Capitation revenue is recognized by our consolidated VIE, AHISP. We do not have an equity interest in this VIE but consolidate it since we are the primary beneficiary of its operations under our management services contract with them. We also earn management fees under our management services contracts with other IPAs and MSOs which are reported as revenue.

The population health management division had $0.1 million of operating income for the three months ended

March 31, 2023. Strategically, we are focused on the growth of this division principally through the addition of new independent physician associations and have staffed our organization to manage larger numbers of such organizations.

Real Estate Division. This division reports the operations of consolidated Real Estate Entities where we provide guarantees of their indebtedness or are co-borrowers. During the first quarter of 2023, we deconsolidated one Real Estate Entities after the third-party lenders released our guarantees of associated mortgage loans.

Revenue and operating expenses of consolidated Real Estate Entities are not significant since the extent of these entities’ operations is to own facilities leased to our hospital division entities which are financed by a combination of contributed equity by related parties and third-party mortgage indebtedness. Such leases are typically on a triple net basis where our hospital division is responsible for all operating costs, repairs and taxes on the facilities. Finance lease income is recognized outside of segment operating income as other income by the Real Estate Entities. However, these amounts are largely eliminated in the consolidation of these entities into our financial statements.

At March 31, 2023, two Real Estate Entities continue to be consolidated in our financial statements. We expect that hospitals we open in the future may be leased from new Real Estate Entities which may be owned in whole or part by related parties. Third-party lenders to these entities may require that we provide a guarantee or become co-borrowers under mortgage indebtedness financings for such facilities. In such instances, we may be required to consolidate these new Real Estate Entities in our financial statements as VIEs.

Corporate and other costs. Corporate and other costs in the three months ended March 31, 2023 included general and administrative expenses totaling $7.2 million. Our corporate costs for the three months ended March 31, 2022 totaled $6.6 million and consisted of general and administrative expenses. General and administrative costs include our executive management, accounting, human resources, corporate technology, insurance and professional fees. We have incurred higher levels of professional fees as a public company. During the three months ended March 31, 2023, we incurred closing costs of $0.2 million due to the closure of three facilities in January 2023. In addition, we have made staffing and management additions commensurate with our operational growth. In March 2023, we issued 1,000,000 common shares to Apollo Medical Holdings, Inc. for IPA managerial services. We recognized $1.9 million of stock-based compensation expense for this issuance.

Nonoperating items

Interest expense. Interest expense totaled $3.1 million in the three months ended March 31, 2023 as compared with $1.9 million for the same period of 2022. This includes interest expense associated with the mortgage indebtedness of consolidated Real Estate Entities, interest expense on outstanding term notes and lines of credit for financing operating equipment and working capital needs and interest expense for financing leases.

Income tax expense. Income tax provisions for interim quarterly periods are generally based on an estimated annual effective income tax rate calculated separately from the effect of significant, infrequent or unusual items related specifically to interim periods. The income tax impact of discrete items is recognized in the period these occur.

Our effective tax rate for the three months ended March 31, 2023, excluding the non-deductible goodwill impairment expense, was approximately 11.63%. The primary difference from the federal statutory rate of 21% is related to state taxes, income of noncontrolling interests in flow-through entities and permanent differences for non-deductible expenses.

Liquidity and Capital Resources

As of March 31, 2023, we had $32.8 million of cash and equivalents, compared to $34.3 million of cash and equivalents at December 31, 2022.

Significant sources and uses of cash during the first three months of 2023.

Sources of cash:

• Cash from operating activities was $1.1 million, which included $2.9 million from the primary components of our working capital (receivables, inventories, accounts payable and expenses).
• We received net proceeds of $5.4 million from borrowings under notes payable and lines of credit.

Uses of cash:

• Capital expenditures were $4.4 million.
• Distributions, net of contributions, to noncontrolling interests totaling $1.5 million.
• Cash associated with the deconsolidated Real Estate Entity totaled $1.0 million.

Future sources and uses of cash. Our operating activities are financed with cash on hand which is generated from revenues, which may vary significantly based on regulatory changes affecting the timing and amounts of insurance reimbursements for our services. Most of our hospital facilities are leased from various lessors including related parties. These leases are presented in our consolidated balance sheets unless the lease is from a consolidated Real Estate Entity. Our growth plans include the development of new hospital locations. We expect that in many of these locations we will lease facilities from newly established entities partially owned by related parties.

We routinely enter into equipment lease agreements to procure new or replacement equipment and may also finance these purchases with term debt‎. We have smaller lines of credits available for working capital purposes and are presently working to supplement or replace these with larger financing commitments. These larger financing commitments are subject to market conditions and we may not be able to obtain such larger financing commitments at favorable economic terms or at all. We also believe that our existing cash, cash equivalents, and marketable securities, and available borrowing capacity, in addition to the $12.8 million of net proceeds received in connection with the execution of the Yorkville PPA on April 11, 2023, will be sufficient to meet our anticipated cash needs requirements for operations and growth objectives for at least the next twelve months. If the assumptions underlying our business plan regarding future revenue and expenses change or if unexpected opportunities or needs arise, we may seek to raise additional cash by selling equity or debt securities.

Indebtedness. The Company’s indebtedness at March 31, 2023 is presented in Item I, “Financial Statements – Note 8 – Debt” and our lease obligations are presented in Item I, “Financial Statements—Note 9 – Leases.”

Off-Balance Sheet Arrangements

As of March 31, 2023, we had no material off-balance sheet arrangements.

Non-GAAP Financial Measures

Adjusted EBITDA. Adjusted EBITDA is used as a supplemental non-GAAP financial measure by management and external users of our financial statements, such as industry analysts, investors, lenders and rating agencies. We believe Adjusted EBITDA is useful because it allows us to more effectively evaluate our operating performance.

We define Adjusted EBITDA as net income (loss) attributable to Nutex Health Inc. plus net interest expense, income taxes, depreciation and amortization, further adjusted for stock-based compensation, any facilities closing costs, acquisition related costs and impairments. A reconciliation of net income to Adjusted EBITDA is included below. Adjusted EBITDA is not intended to serve as an alternative to U.S. GAAP measures of performance and may not be comparable to similarly-titled measures presented by other companies.

Significant Accounting Policies

The preparation of financial statements and related disclosures in accordance with GAAP requires management to make judgments, assumptions and estimates that affect the amounts reported in the consolidated financial statements and accompanying notes. Note 1 to the Consolidated Financial Statements included in the Form 10-K for the year ended December 31, 2022 describes the significant accounting policies and methods used in the preparation of the consolidated financial statements. The Company’s critical accounting policies that are impacted by judgments, assumptions and estimates are described in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2022. Since December 31, 2022, there have been no material changes in the Company’s accounting policies that are impacted by judgments, assumptions and estimates.

With respect to the three months ended March 31, 2023, there have been no material changes in our primary market risk exposures or how those exposures are managed since the information disclosed in our 2022 Form 10-K.

Evaluation of Disclosure Controls and Procedures. We maintain disclosure controls and procedures as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act that are designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In accordance with Rule 13a-15(b) of the Exchange Act, we have evaluated, under the supervision of our CEO and our CFO, the effectiveness of disclosure controls and procedures as of March 31, 2023. Based on this evaluation, the Company concluded that our disclosure controls and procedures were not effective as of March 31, 2023 due to the material weakness previously identified as described below.

Previously Reported Material Weaknesses. We previously identified material weaknesses in our internal control over financial reporting in our Form 10-K for the year ended December 31, 2022, based on criteria established in the Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”). Based on our assessment, the following material weaknesses were identified:

• The Company did not design and implement logical access controls for certain financially relevant systems. Business process controls, both automated and manual, that are dependent upon the information derived from those financially relevant systems were also determined to be ineffective as a result of such deficiency;
• Business process controls across the entity’s financial reporting processes were not effectively designed and implemented to properly address the risk of material misstatement, including controls without proper segregation of duties between preparer and reviewer and key management review controls; and
• Ineffective design and implementation of controls over the completeness and accuracy of information included in key spreadsheets supporting the financial statements.

Management has concluded that, based on applying the COSO criteria, as of December 31, 2022, the Company’s internal control over financial reporting was not effective to provide reasonable assurance of the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.

Remediation Plans. These material weaknesses did not result in material misstatement of the Company’s consolidated financial statements for the periods presented. The Company has started the process of designing and implementing effective internal control measures to remediate the material weakness. The Company’s efforts include the implementation of a new enterprise-wide system in the first quarter of 2023 that will reduce reliance on manual processes and spreadsheets supporting the financial statements. Additionally, the Company plans to engage a firm to assist in the proper design, implementation and testing of internal controls over financial reporting. We expect to add key senior management positions including a Chief Operating Officer as well in the near term. We have also already made some additions to our accounting and financial reporting teams in the first quarter of 2023.

While we believe that these efforts will improve our internal control over financial reporting, our remediation efforts are ongoing and will require validation and testing of the design and operating effectiveness of internal controls. The actions that we are taking are subject to ongoing senior management review, as well as audit committee oversight. We will not be able to conclude whether the steps we are taking will fully remediate the remaining material weakness in our internal control over financial reporting until we have completed our remediation efforts and subsequent evaluation of their effectiveness. We may also conclude that additional measures may be required to remediate the material weakness in our internal control over financial reporting.

Changes in Internal Control Over Financial Reporting. We are taking actions to remediate the material weakness relating to our internal control over financial reporting, as described above. Except as otherwise described herein, there were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the period covered by this Quarterly Report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. We are making changes to our internal control over financial reporting in connection with the implementation of our new enterprise-wide system in the first quarter of 2023.

Inherent Limitations on Effectiveness of Disclosure Controls and Procedures. Our senior members of management do not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In addition to the other information set forth in this Quarterly Report, you should carefully consider the risk factors and other cautionary statements described under the heading “Risk Factors” included in our Form 10-K for the year ended December 31, 2022 and the risk factors and other cautionary statements contained in our other SEC filings, which could materially affect our businesses, financial condition or future results. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or future results. In addition, you should carefully consider the risks described below.

Substantial blocks of our Common Stock may be sold into the market as a result of the Pre-Paid Advance Agreement.

The price of our Common Stock could decline if there are substantial sales of shares of our Common Stock, if there is a large number of shares of our Common Stock available for sale, or if there is the perception that these sales could occur.

On April 11, 2023, we entered into the PPA with Yorkville. Pursuant to the PPA, we may request Pre-Paid Advances of up to $25 million each from Yorkville (or such greater amount that the parties may mutually agree), with a limitation on outstanding Pre-Paid Advances ranging from up to $25 million to $5 million depending on stock price and volume conditions being met, and an aggregate Commitment Amount of $100 million. At the request and sole discretion of Yorkville, such Pre-Paid Advances will be correspondingly reduced upon the issuance of our Common Stock to Yorkville at a Purchase Price equal to (a) $1.00 in respect of the initial Pre-Paid Advance, and (b) with respect to each subsequent Pre-Paid Advance the lower of (i) 100% of the volume weighted average price (VWAP) of the Company’s common stock on the trading day immediately preceding the closing of such Pre- Paid Advance or (ii) 92.0% of the average of the two lowest daily VWAP of the shares during the seven trading days immediately prior to each Pre-Paid Advance, subject to a floor price of $0.1851 per share.

Any issuances of shares of our Common Stock pursuant to the PPA to offset the Pre-Paid Advances will dilute the percentage ownership of stockholders and may dilute the per share projected earnings (if any) or book value of our Common Stock. Sales of a substantial number of shares of our Common Stock in the public market or other issuances of shares of our Common Stock, or the perception that these sales or issuances could occur, could cause the market price of our Common Stock to decline and may make it more difficult for you to sell your shares at a time and price that you deem appropriate.

We may not receive the full amount of the initial Pre-Paid Advance

Yorkville has agreed to pay to the Company the initial Pre-Paid Advance amount as follows: (i) $15 million on April 11, 2023, and (ii) $10 million on the earlier of (y) June 10, 2023, or (z) the date upon which the outstanding balance on the initial portion of the initial Pre-Paid Advance has been reduced below $1 million, in both cases, as long as the VWAP for the ten trading days prior to June 10, 2023 or the date when the balance is reduced below $1 million, as applicable, is at least $0.60 per share, otherwise, the parties hereto shall mutually agree on the amount and timing of the remaining $10 million payment. As a result, we may only receive total proceeds, before expenses, of approximately $12.8 million, before expenses.

Once we receive a Pre-Paid Advance, we do not have the right to control the timing and amount of the issuance of our shares of Common Stock to Yorkville under the PPA and, accordingly, it is not possible to predict the actual number of shares we will issue pursuant to the Pre-Paid Advance Agreement at any one time or in total.

Once we receive any of the Pre-Paid Advances, including the initial Pre-Paid Advance, we do not have the right to control the timing and amount of any issuances of our shares of Common Stock to Yorkville under the PPA. Sales of our Common Stock, if any, to Yorkville under the PPA will depend upon market conditions and other factors, and the discretion of Yorkville. We may ultimately decide to sell to Yorkville all, some or none of the shares of our Common Stock that may be available for us to sell to Yorkville pursuant to the PPA. Each Pre-Paid Advance matures within one year.

Because the purchase price per share to be paid by Yorkville for the shares of Common Stock that we may elect to sell to Yorkville under the PPA, if any, will fluctuate based on the market prices of our Common Stock, if any, it is not possible for us to predict, prior to any such sales, the number of shares of Common Stock that we will sell to Yorkville under the PPA, the purchase price per share that Yorkville will pay for shares purchased from us under the PPA, or the aggregate gross proceeds that we will receive from those purchases by Yorkville under the PPA, if any.

In addition, unless we satisfy the exception set forth in the PPA based on the average price of our sales thereunder or we obtain stockholder approval, we will not be able to issue shares of our Common Stock in excess of 19.9% of the outstanding shares of Common Stock as of April 10, 2023 (the “Exchange Cap”) under the PPA (or any other transaction that is integrated with the PPA) in accordance with applicable Nasdaq rules. Depending on the market prices of our Common Stock in the future, this could be a significant limitation on the amount of funds we are able to raise pursuant to the PPA. Other limitations in the PPA, including the ownership limitation on Yorkville of 4.99% of the then outstanding voting power or number of shares of outstanding Common Stock (the “Ownership Limitation”), and our ability to meet the conditions necessary to request a Pre-Paid Advance, could also prevent us from being able to request Pre-Paid Advances up to the Commitment Amount.

If we desire to request Pre-Paid Advances under the PPA in excess of $25 million, and the Exchange Cap provisions and other limitations in the PPA would allow us to do so, we would need to file with the SEC one or more prospectus supplements to register under the Securities Act any such additional shares of our Common Stock.

Further, the resale by Yorkville of a significant amount of shares registered in this offering at any given time, or the perception that these sales may occur, could cause the market price of our Common Stock to decline and to be highly volatile.

Upon a trigger event, the Company may be required to make payments that could cause financial hardship to the Company.

Upon entering into the PPA, the Company agreed that within three trading days of (i) the Common Stock’s trading price becoming lower than $0.1851 for any five of seven consecutive trading days or (ii) the Company issuing substantially all of the shares available under the Nasdaq Cap, the Company must pay Yorkville a monthly cash payment (the “Monthly Payment”) of $7.5 million (or such lower amount of a particular Pre-Paid Advance then outstanding), plus any accrued and unpaid interest and a 6% redemption premium. This financial obligation may cause an undue and unsustainable burden on the Company and cause a material adverse effect on the Company’s operations and financial condition.

Our current business plans require a significant amount of capital. If we are unable to obtain sufficient funding or do not have access to capital, we may not be able to execute our business plans and our prospects, financial condition and results of operations could be materially adversely affected.

The extent to which we rely on Yorkville as a source of funding will depend on a number of factors, including the prevailing market price of our Common Stock, our ability to meet the conditions necessary to request for Pre-Paid Advances under the PPA, the impacts of the Exchange Cap and the Ownership Limitation and the extent to which we are able to secure funding from other sources. In addition to the amount of funds we ultimately raise under the PPA, if any, we expect to continue to seek other sources of funding, including by offering additional equity, and/or equity-linked securities, through one or more credit facilities and potentially by offering debt securities, to finance a portion of our future expenditures.

We have experienced operating losses, and we expect to continue to incur operating losses as we implement our business plans. We expect our capital expenditures to continue to be significant in the foreseeable future as we expand our business. We expect to expend capital with significant outlays directed towards expanding current programs and service offerings. As a result, our capital requirements are uncertain and actual capital requirements may be different from those we currently anticipate. In addition, new opportunities for growth in future product lines and markets may arise and may require additional capital.

As of March 31, 2023, our principal source of liquidity is our unrestricted cash balance in the amount of approximately $33 million. We entered into the PPA whereby we will have the ability to request Pre-Paid Advances of up to $25 million. In addition, we previously entered into the Lincoln Committed Equity Financing whereby we will have the right, but not the obligation, to sell to LPCF (“Lincoln Purchase Agreement”) up to $100 million worth of our shares of Common Stock. We may not be able to utilize these facilities to raise additional capital when, or in the amounts, we may require. Nutex has agreed with Yorkville that it will not utilize the Lincoln Purchase Agreement while there are Pre-Paid Advances outstanding under the PPA in excess of $1 million. Any debt we incur from Yorkville or other parties could make us more vulnerable to a downturn in our operating results or a downturn in economic conditions. If our cash flow from operations and our then-existing liquidity is insufficient to meet any debt service requirements, we could be required to refinance our obligations, or dispose of assets in order to meet debt service requirements.

We expect that we will need to raise additional capital in order to continue to execute our business plans in the future, and we plan to use the PPA, if the conditions for its use are satisfied and seek additional equity and/or debt financing, including by offering additional equity, and/or equity-linked securities, through one or more credit facilities and potentially by offering debt securities, to finance a portion of our future expenditures.

The sale of additional equity or equity-linked securities could dilute our stockholders. The incurrence of indebtedness would result in increased debt service obligations and could result in operating and financing covenants that would restrict our operations or our ability to pay dividends to our stockholders. Our ability to obtain the necessary additional financing to carry out our business plans or to refinance, if necessary, any outstanding debt when due is subject to a number of factors, including general market conditions and investor acceptance of our business model. These factors may make the timing, amount, terms and conditions of such financing unattractive or unavailable to us. If we are unable to raise sufficient funds on favorable terms, we may have to significantly reduce our spending, delay or cancel our planned activities or substantially change our corporate structure. We might not be able to obtain any such funding or we might not have sufficient resources to conduct our business as projected, both of which could mean that we would be forced to curtail or discontinue our operations and our prospects, financial consolidated results of operations could be materially adversely affected.