10-Q 1 trhc-20170930x10q.htm 10-Q trhc_Current_Folio_10Q

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2017

 

OR

 

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                      to                     

 

Commission file number 001-37888

 

Tabula Rasa HealthCare, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware
(State of incorporation)

45-5726437
(I.R.S. Employer Identification No.)

228 Strawbridge Drive, Suite 100
Moorestown, NJ 08057
(Address of Principal Executive Offices,
including Zip Code)

(866) 648 - 2767
(Registrant’s Telephone Number,
Including Area Code)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No   

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes     No  

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   

Accelerated filer   

Non-accelerated filer   

Smaller reporting company   

 

 

(Do not check if a

 

 

 

smaller reporting company)

 

Emerging growth company 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Exchange Act). Yes   No 

 

As of October 31, 2017, the Registrant had 17,848,999 shares of Common Stock outstanding.

 

 

 

 


 

TABULA RASA HEALTHCARE, INC.

QUARTERLY REPORT ON FORM 10-Q

For the period ended September 30, 2017

 

TABLE OF CONTENTS

 

 

 

Page

 

 

Number

 

 

 

PART I 

Financial Information

3

Item 1. 

Financial Statements

3

 

Unaudited Consolidated Balance Sheets as of September 30, 2017 and December 31, 2016 

3

 

Unaudited Consolidated Statements of Operations for the three and nine months ended September 30, 2017 and 2016

4

 

Unaudited Consolidated Statement of Stockholders’ Equity for the nine months ended September 30, 2017

5

 

Unaudited Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 and 2016

6

 

Notes to Unaudited Consolidated Financial Statements

7

Item 2. 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

27

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

47

Item 4. 

Controls and Procedures

47

PART II 

Other Information

48

Item 1. 

Legal Proceedings

48

Item 1A. 

Risk Factors

48

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

50

Item 3. 

Defaults Upon Senior Securities

50

Item 4. 

Mine Safety Disclosures

50

Item 5. 

Other Information

50

Item 6. 

Exhibits

51

Signatures 

52

 

 

 

 

 

2


 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

 

TABULA RASA HEALTHCARE, INC.

UNAUDITED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

 

 

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

 

    

2017

    

2016

    

Assets 

 

(unaudited)

 

 

 

 

Current assets: 

 

 

 

 

 

 

 

Cash

 

$

5,939

 

$

4,345

 

Accounts receivable, net

 

 

16,631

 

 

6,646

 

Inventories

 

 

2,781

 

 

2,911

 

Rebates receivable

 

 

342

 

 

312

 

Prepaid expenses

 

 

2,278

 

 

869

 

Other current assets

 

 

315

 

 

581

 

Total current assets

 

 

28,286

 

 

15,664

 

Property and equipment, net

 

 

8,872

 

 

6,409

 

Software development costs, net

 

 

4,264

 

 

3,350

 

Goodwill

 

 

63,125

 

 

21,686

 

Intangible assets, net

 

 

63,347

 

 

25,297

 

Other assets

 

 

647

 

 

333

 

Total assets

 

$

168,541

 

$

72,739

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Current portion of long-term debt

 

$

927

 

$

674

 

Acquisition-related consideration payable

 

 

50

 

 

568

 

Acquisition-related contingent consideration

 

 

15,224

 

 

1,493

 

Accounts payable

 

 

14,366

 

 

6,115

 

Accrued expenses and other liabilities

 

 

8,101

 

 

2,159

 

Total current liabilities

 

 

38,668

 

 

11,009

 

Line of credit

 

 

35,000

 

 

 —

 

Long-term debt

 

 

1,019

 

 

1,072

 

Long-term acquisition-related contingent consideration

 

 

13,652

 

 

1,515

 

Deferred income tax liability

 

 

1,592

 

 

832

 

Other long-term liabilities

 

 

2,637

 

 

2,205

 

Total liabilities

 

 

92,568

 

 

16,633

 

  

 

 

 

 

 

 

 

Commitments and contingencies (Note 16)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

Preferred stock, $0.0001 par value; 10,000,000 shares authorized; no shares issued and outstanding at September 30, 2017 and December 31, 2016

 

 

 —

 

 

 —

 

Common stock, $0.0001 par value; 100,000,000 shares authorized, 17,905,402 and 16,628,476 shares issued and 17,831,936 and 16,628,476 shares outstanding at September 30, 2017 and December 31, 2016, respectively

 

 

 2

 

 

 2

 

Additional paid-in capital

 

 

108,503

 

 

91,027

 

Treasury stock, at cost; 73,466 and no shares at September 30, 2017 and December 31, 2016, respectively

 

 

(959)

 

 

 —

 

Accumulated deficit

 

 

(31,573)

 

 

(34,923)

 

Total stockholders’ equity

 

 

75,973

 

 

56,106

 

Total liabilities and stockholders’ equity

 

$

168,541

 

$

72,739

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

3


 

TABULA RASA HEALTHCARE, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except share and per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30, 

 

September 30, 

 

 

    

2017

    

2016

    

2017

    

2016

    

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

Product revenue

  

$

24,621

 

$

20,731

 

$

71,391

 

$

58,732

 

Service revenue

 

 

8,647

 

 

3,443

 

 

19,222

 

 

8,017

 

Total revenue

 

 

33,268

 

 

24,174

 

 

90,613

 

 

66,749

 

Cost of revenue, exclusive of depreciation and amortization shown below:

 

 

 

 

 

 

 

 

 

 

 

 

 

Product cost

 

 

18,979

 

 

15,951

 

 

54,847

 

 

44,103

 

Service cost

 

 

4,486

 

 

1,232

 

 

9,241

 

 

3,135

 

Total cost of revenue

 

 

23,465

 

 

17,183

 

 

64,088

 

 

47,238

 

Gross profit

 

 

9,803

 

 

6,991

 

 

26,525

 

 

19,511

 

Operating expenses: 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development 

 

 

1,527

 

 

1,028

 

 

4,037

 

 

2,878

 

Sales and marketing

 

 

1,325

 

 

881

 

 

3,869

 

 

2,511

 

General and administrative 

 

 

4,098

 

 

2,053

 

 

16,097

 

 

5,762

 

Change in fair value of acquisition-related contingent consideration expense

 

 

923

 

 

47

 

 

960

 

 

146

 

Depreciation and amortization

 

 

2,166

 

 

1,276

 

 

5,730

 

 

3,415

 

Total operating expenses 

 

 

10,039

 

 

 5,285

 

 

30,693

 

 

14,712

 

Income (loss) from operations

 

 

(236)

 

 

1,706

 

 

(4,168)

 

 

4,799

 

Other (income) expense: 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in fair value of warrant liability

 

 

 —

 

 

(626)

 

 

 —

 

 

(639)

 

Interest expense

 

 

174

 

 

1,242

 

 

327

 

 

4,250

 

Loss on extinguishment of debt

 

 

 —

 

 

1,396

 

 

 —

 

 

1,396

 

Total other expense

 

 

174

 

 

2,012

 

 

327

 

 

5,007

 

Income (loss) before income taxes

 

 

(410)

 

 

(306)

 

 

(4,495)

 

 

(208)

 

Income tax (benefit) expense

 

 

(8,105)

 

 

(164)

 

 

(7,845)

 

 

11

 

Net income (loss)

 

$

7,695

 

$

(142)

 

$

3,350

 

$

(219)

 

Net income (loss) attributable to common stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

7,695

 

$

1,228

 

$

3,350

 

$

1,080

 

Diluted

 

$

7,695

 

$

(803)

 

$

3,350

 

$

(894)

 

Net income (loss) per share attributable to common stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.46

 

$

0.25

 

$

0.20

 

$

0.22

 

Diluted

 

$

0.41

 

$

(0.08)

 

$

0.18

 

$

(0.09)

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

16,699,102

 

 

4,918,885

 

 

16,483,169

 

 

4,817,285

 

Diluted

 

 

18,646,031

 

 

10,333,723

 

 

18,411,800

 

 

10,232,050

 

 

See accompanying notes to unaudited consolidated financial statements.

 

 

4


 

TABULA RASA HEALTHCARE, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(In thousands, except share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders' Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

Preferred Stock

 

Common Stock

 

Treasury Stock

 

Additional

 

Accumulated

 

Stockholders'

 

    

    

Shares

    

Amount

    

Shares

    

Amount

 

Shares

    

Amount

    

Paid-in Capital

    

Deficit

    

Equity

Balance, January 1, 2017

 

 

 —

 

$

 —

 

16,628,476

 

$

 2

 

 —

 

$

 —

 

$

91,027

 

$

(34,923)

 

$

56,106

Issuance of common stock in connection with acquisition

 

 

 —

 

 

 —

 

520,821

 

 

 —

 

 —

 

 

 —

 

 

11,541

 

 

 —

 

 

11,541

Issuance of restricted stock

 

 

 —

 

 

 —

 

35,596

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Shares surrendered by stockholder

 

 

 —

 

 

 —

 

(246)

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Shares repurchased

 

 

 —

 

 

 —

 

 —

 

 

 —

 

(73,466)

 

 

(959)

 

 

 —

 

 

 —

 

 

(959)

Net exercise of stock warrants

 

 

 —

 

 

 —

 

28,431

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Net exercise of stock options

 

 

 —

 

 

 —

 

593,887

 

 

 —

 

 —

 

 

 —

 

 

(2,035)

 

 

 —

 

 

(2,035)

Exercise of stock options

 

 

 —

 

 

 —

 

98,437

 

 

 —

 

 —

 

 

 —

 

 

194

 

 

 —

 

 

194

Stock-based compensation expense

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

7,776

 

 

 —

 

 

7,776

Net income

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

3,350

 

 

3,350

Balance, September 30, 2017

 

 

 —

 

$

 —

 

17,905,402

 

$

 2

 

(73,466)

 

$

(959)

 

$

108,503

 

$

(31,573)

 

$

75,973

 

See accompanying notes to unaudited consolidated financial statements.

 

 

5


 

TABULA RASA HEALTHCARE, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

September 30, 

 

 

    

2017

    

2016

    

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income (loss)

 

$

3,350

 

$

(219)

 

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

 

5,730

 

 

3,415

 

Amortization of deferred financing costs and debt discount

 

 

72

 

 

1,255

 

Payment of imputed interest on debt

 

 

 —

 

 

(3,893)

 

Deferred taxes

 

 

(8,137)

 

 

(27)

 

Stock-based compensation

 

 

7,776

 

 

481

 

Change in fair value of warrant liability

 

 

 —

 

 

(639)

 

Change in fair value of acquisition-related contingent consideration

 

 

960

 

 

146

 

Other noncash items

 

 

17

 

 

 —

 

Loss on extinguishment of debt

 

 

 —

 

 

1,396

 

Changes in operating assets and liabilities, net of effect from acquisition:

 

 

 

 

 

 

 

Accounts receivable, net

 

 

(1,676)

 

 

(1,729)

 

Inventories

 

 

130

 

 

(305)

 

Rebates receivable

 

 

(30)

 

 

759

 

Prepaid expenses and other current assets

 

 

(169)

 

 

(114)

 

Other assets

 

 

(58)

 

 

(171)

 

Accounts payable   

 

 

29

 

 

(191)

 

Accrued expenses and other liabilities

 

 

3,274

 

 

340

 

Other long-term liabilities

 

 

432

 

 

1,973

 

Net cash provided by operating activities

 

 

11,700

 

 

2,477

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(2,618)

 

 

(2,947)

 

Software development costs

 

 

(2,223)

 

 

(1,201)

 

Purchases of intangible assets

 

 

 —

 

 

(29)

 

Change in restricted cash

 

 

 —

 

 

200

 

Purchase of businesses, net of cash acquired

 

 

(34,452)

 

 

(1,000)

 

Net cash used in investing activities

 

 

(39,293)

 

 

(4,977)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Payments for repurchase of common stock

 

 

(959)

 

 

 —

 

Proceeds from exercise of stock options

 

 

194

 

 

 —

 

Payments for employee taxes for shares withheld

 

 

(2,123)

 

 

 —

 

Payments for debt financing costs

 

 

(220)

 

 

(1,521)

 

Borrowings on line of credit

 

 

35,342

 

 

6,000

 

Repayments of line of credit

 

 

(342)

 

 

 —

 

Payments of acquisition-related consideration

 

 

(550)

 

 

(180)

 

Repayment of note payable related to acquisition

 

 

 —

 

 

(14,337)

 

Payments of initial public offering costs

 

 

(132)

 

 

(2,191)

 

Payments of contingent consideration

 

 

(1,498)

 

 

(1,895)

 

Proceeds from long-term debt

 

 

 —

 

 

30,000

 

Repayments of long-term debt

 

 

(525)

 

 

(13,609)

 

Net cash provided by financing activities

 

 

29,187

 

 

2,267

 

Net increase (decrease) in cash

 

 

1,594

 

 

(233)

 

Cash, beginning of period

 

 

4,345

 

 

2,026

 

Cash, end of period

 

$

5,939

 

$

1,793

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

Acquisition of equipment under capital leases

 

$

50

 

$

1,470

 

Additions to property, equipment, and software development purchases included in accounts payable

 

$

46

 

$

238

 

Deferred offering costs included in accounts payable

 

$

 —

 

$

1,006

 

Cash paid for interest

 

$

156

 

$

7,901

 

Decretion of redeemable convertible preferred stock to redemption value

 

$

 —

 

$

(2,439)

 

Stock issued in connection with acquisition

 

$

11,541

 

$

 —

 

 

See accompanying notes to unaudited consolidated financial statements.

 

6


 

Table of Contents

TABULA RASA HEALTHCARE, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except share and per share data)

 

1.      Nature of Business

 

Tabula Rasa HealthCare, Inc. (the “Company”) provides patient-specific, data-driven technology and solutions that enable healthcare organizations to optimize medication regimens to improve patient outcomes, reduce hospitalizations, lower healthcare costs and manage risk. The Company delivers its solutions through a comprehensive suite of technology-enabled products and services for medication risk management and risk adjustment. The Company serves healthcare organizations that focus on populations with complex healthcare needs and extensive medication requirements. The Company's suite of cloud-based software solutions provides prescribers, pharmacists and healthcare organizations with sophisticated and innovative tools to better manage the medication-related needs of patients.

 

On October 4, 2016, the Company closed its initial public offering (the “IPO”) in which the Company issued and sold 4,300,000 shares of common stock, plus the exercise of the underwriters’ option to purchase an additional 645,000 shares of common stock, at an issuance price of $12.00 per share. The Company received net proceeds of $55,186 after deducting underwriting discounts and commissions of $4,154 but before deducting other offering expenses. In addition, upon the closing of the IPO, all of the Company’s then outstanding Class A Non-Voting common stock and Class B Voting common stock, totaling 5,583,405 shares, were automatically redesignated into shares of common stock, and all of the Company’s then outstanding convertible preferred stock converted into an aggregate of 5,089,436 shares of common stock. In addition, 202,061 shares of common stock were issued upon the automatic net exercise of outstanding warrants to purchase common stock that would have otherwise terminated immediately prior to the closing of the IPO. Additionally, in connection with the closing of the IPO, outstanding warrants to purchase shares of preferred stock converted into warrants to purchase an aggregate of 463,589 shares of common stock.

 

 

2.      Summary of Significant Accounting Policies

 

The Company's significant accounting policies are disclosed in the Company’s audited consolidated financial statements for the year ended December 31, 2016, which are included in the Company’s annual report filed on Form 10-K on March 14, 2017. Since the date of those audited consolidated financial statements, there have been no changes to the Company's significant accounting policies, including the status of recent accounting pronouncements, other than those detailed below.

 

(a)    Basis of Presentation

 

              The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (the “SEC”) regarding interim financial reporting. The unaudited interim consolidated financial statements have been prepared on the same basis as the annual audited consolidated financial statements and, in the opinion of management, reflect all adjustments (consisting of normal recurring accruals and adjustments), necessary for the fair statement of the Company's interim consolidated financial position for the periods indicated. The interim results for the three and nine months ended September 30, 2017 are not necessarily indicative of results to be expected for the year ending December 31, 2017, any other interim periods, or any future year or period. As such, the information included in this quarterly report on Form 10-Q should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s annual report as filed on Form 10-K.

 

(b)    Liquidity

 

              The Company's unaudited consolidated financial statements have been prepared on the basis of continuity of operations, realization of assets and the satisfaction of liabilities in the ordinary course of business. Management believes that the Company's cash on hand of $5,939 as of September 30, 2017, cash flows from operations and borrowing availability under the Amended and Restated 2015 Revolving Line are sufficient to fund the Company's planned operations through at least December 31, 2018. See Note 10 for additional information.

 

7


 

Table of Contents

TABULA RASA HEALTHCARE, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except share and per share data)

 

(c)    Use of Estimates

 

              The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates or assumptions.

 

(d)    Revenue Recognition

 

The Company recognizes revenue from product sales or services rendered when (i) persuasive evidence of an arrangement exists, (ii) services have been rendered, (iii) the price to its client is fixed or determinable and (iv) collectability is reasonably assured.

 

When the Company enters into arrangements with multiple deliverables, it applies the accounting guidance for revenue arrangements with multiple deliverables and evaluates each deliverable to determine whether it represents a separate unit of accounting based on the following criteria: (i) whether the delivered item has value to the customer on a standalone basis, and (ii) if the contract includes a general right of return relative to the delivered item, delivery or performance of the undelivered item(s) is considered probable and substantially in the control of the Company. Revenue is allocated to each element in an arrangement based on a selling price hierarchy. The selling price for a deliverable is based on estimated selling prices ("ESP") as vendor specific objective evidence or third party evidence is not available. The Company establishes ESP for the elements of its arrangements based upon its pricing practices and class of customers. The stated prices for the various deliverables of the Company's contracts are consistent across classes of customers.

 

Product Revenue

 

The Company enters into multiple-element arrangements with healthcare organizations to provide software enabled medication risk management solutions. Under these contracts, revenue is generated through the components listed below.

 

Prescription medication revenue

 

The Company sells prescription medications directly to healthcare organizations through its prescription fulfillment pharmacies. Prescription medication fees are based upon the prices stated in customer contracts for the prescription and include a dispensing fee. Prescription medication revenue, including dispensing fees, is recognized when the product is shipped to the customer. Prescription medications are considered a separate unit of accounting.

 

Per member per month fees — medication risk management services

 

The Company receives a fixed monthly administrative fee for each member in the program contracted for medication risk management services. This fee, which is included in product revenue in the consolidated statement of operations, is recognized on a monthly basis as medication risk management services are provided. The services associated with the per member per month fees are considered a separate unit of accounting.

 

Service Revenue

 

The Company provides medication risk management services utilizing the Medication Risk Mitigation Matrix (“MRM Matrix”) technology alone, without the related fulfillment services, which are referred to as MRM Service Contracts. The Company began entering into these MRM Service Contracts in the third quarter of 2016. The Company’s MRM Service Contracts also include services provided by the SinfoníaRx business, which was acquired on September 6, 2017. The SinfoníaRx business provides Medication Therapy Management (“MTM”) technology and services for

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Table of Contents

TABULA RASA HEALTHCARE, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except share and per share data)

 

Medicare, Medicaid, and commercial health plans, which are referred to as MTM Contracts. See Note 4 for additional information about the acquisition of the SinfoníaRx business.

 

The Company also enters into contracts with healthcare organizations to provide (i) risk adjustment and (ii) pharmacy cost management services, which include training client staff and providers about documentation and diagnosis coding, analyzing clients' data collection and submission processes, and delivering meaningful analytics for understanding reimbursement complexities.  

 

Under the MRM Service Contracts, MTM Contracts and risk adjustment contracts, there are generally three revenue generating components:

 

Set up fees:

 

The Company's contracts for Medication Risk Mitigation (“MRM”) and risk adjustment services often require customers to pay non-refundable set up fees, which are deferred and recognized over the estimated term of the contract. These fees are charged at the beginning of the customer relationship as compensation for the Company's efforts to prepare the customer and configure its system for the data collection process. The set up activities do not represent a separate unit of accounting as they do not have value apart from the broader MRM Service Contracts, MTM Contracts and risk adjustment contracts. Incremental direct costs associated with such set up activities are also deferred and amortized over the shorter of the estimated customer life or stated contract period.

 

Per member per month fees

 

The Company receives a fixed monthly fee for each member in the respective programs. These services represent a separate unit of accounting and are offered independently from any other services. Revenue for these services is recognized each month as the services are performed.

 

Hourly consulting fees or transactional based fees

 

The Company sometimes contracts with customers to perform various other services. Such services are billed on a time and materials basis, at agreed hourly rates, or on a per transaction basis. Consulting services represent a separate unit of accounting and are offered independently from any other services. Revenue for these services is recognized as time is incurred on the project.

 

The Company's pharmacy cost management services include subscription revenue from customers and revenues from drug manufacturers for the sale of drug utilization data. Subscription revenue is recognized monthly as either a flat fee or as a percentage of monthly transactions incurred. Data and statistics fees from drug manufacturers are recognized as revenue when received due to the unpredictable nature of the payments and because fees are not fixed and determinable until received.

 

(e)    Cost of Product Revenue

 

Cost of product revenue includes all costs directly related to the medication risk management offering, including costs relating to the Company's pharmacists' collaboration on a patient's medication management, clinical analysis of the results and, when necessary, offering guidance to the prescriber based upon the review of the medication risk mitigation matrix and the individual patient's medical history, as well as the fulfillment and distribution of prescription drugs. Costs consist primarily of the purchase price of the prescription drugs the Company dispenses, expenses to package, dispense and distribute prescription drugs, expenses associated with the Company's medication care plan support centers and prescription fulfillment centers, including employment costs and stock-based compensation, and expenses related to the hosting of the Company's technology platform. Such costs also include direct overhead expenses, as well as allocated miscellaneous overhead costs. The Company allocates miscellaneous overhead costs among functions based on employee headcount.

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TABULA RASA HEALTHCARE, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except share and per share data)

 

 

(f)    Cost of Service Revenue

 

Cost of service revenue includes all labor costs, including stock-based compensation expense, directly related to the risk adjustment and pharmacy cost management services and expenses for claims processing, technology services and overhead costs. In addition, service costs include all costs directly related to servicing the Company’s MRM Service Contracts and MTM Contracts, which primarily consist of labor costs, consultant fees, technology services and overhead costs.

 

(g)    Recent Accounting Pronouncements

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers ("ASU 2014-09") and has subsequently issued a number of amendments to ASU 2014-09. ASU 2014-09, as amended, represents a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of promised goods or services to clients in an amount that reflects the consideration to which the Company expects to be entitled to receive in exchange for those goods or services. ASU 2014-09 sets forth a new five-step revenue recognition model which replaces the prior revenue recognition guidance in its entirety and is intended to eliminate numerous industry-specific pieces of revenue recognition guidance that have historically existed. For public companies, ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2017 and interim reporting periods within that reporting period. Early adoption is permitted for annual reporting periods beginning after December 15, 2016; however, the Company does not intend to early adopt the new standard. Companies may use either a full retrospective or a modified retrospective approach to adopt ASU 2014-09.

 

The Company intends to adopt the new standard effective January 1, 2018 but has not yet determined which transition method will be used. The Company is currently analyzing significant contracts with customers to determine the impact of the adoption of ASU 2014-09 on the Company’s consolidated financial statements and disclosures. The Company will continue to assess all potential impacts of the standard on existing and new customer contracts during 2017 and on the Company’s processes and internal controls over financial reporting. A final evaluation of the impact of the adoption of the new standard is expected to be completed by the end of 2017.

 

In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory ("ASU 2015-11"), which simplifies the subsequent measurement of inventories by replacing the current lower of cost or market test with a lower of cost and net realizable value test. ASU 2015-11 is effective for public business entities for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted. The Company has adopted ASU 2015-11 effective January 1, 2017. The adoption of this standard did not have any impact on the Company's consolidated financial statements.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) ("ASU 2016-02"). The new standard establishes a right-of-use ("ROU") model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. ASU 2016-02 is effective for annual periods beginning after December 15, 2018, including interim periods within those annual periods, with early adoption permitted. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is currently evaluating the potential impact of the adoption of this standard and anticipates that this standard will have a material impact on the Company’s consolidated financial statements, as all long-term leases will be capitalized on the consolidated balance sheet.

 

In March 2016, the FASB issued ASU 2016-09, Compensation — Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting ("ASU 2016-09"). The amendments in this update simplify certain aspects related to how share-based payments are accounted for and presented in the financial statements. The new guidance requires excess tax benefits and tax deficiencies be recorded as an income tax benefit or expense in the statement of operations when the awards vest or are settled and as operating cash flows when realized. The excess

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TABULA RASA HEALTHCARE, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except share and per share data)

 

tax benefits are recognized regardless of whether the benefit reduces income taxes payable in the current period. It also allows an employer to repurchase more of an employee's shares than it can today for tax withholding purposes without triggering liability accounting and to make a policy election to account for forfeitures as they occur. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. The Company adopted ASU 2016-09 effective January 1, 2017. The Company elected to record forfeitures as they occur. There was no impact of this election because prior to the adoption the Company’s historical forfeitures were de minimus. The adoption of this new standard resulted in the recognition of a tax benefit in the amount of $2,830 in the consolidated statement of operations related to tax windfall benefits generated during the nine months ended September 30, 2017.

 

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments ("ASU 2016-15"). ASU 2016-15 provides new guidance to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. ASU 2016-15 is effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company is currently evaluating the potential impact of the adoption of ASU 2016-15 on the Company's consolidated financial statements.

 

In January 2017, the FASB issued Accounting Standards Update No. 2017-01, Business Combinations (“ASU 2017-01”). ASU 2017-01 provides guidance for evaluating whether a set of transferred assets and activities (the “set”) should be accounted for as an acquisition of a business or group of assets. The guidance provides a screen to determine when a set does not qualify to be a business. When substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in an identifiable asset or a group of similar assets, the set is not a business. Also to be considered a business, the set would have to include an input and a substantive process that together significantly contribute to the ability to create outputs. ASU 2017-01 is effective for financial statements issued for fiscal years beginning after December 15, 2017. The Company is currently evaluating the potential impact of the adoption of ASU 2017-01 on the Company's consolidated financial statements.

 

In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment ("ASU 2017-04"). ASU 2017-04 simplifies the accounting for goodwill impairment by eliminating the requirement to calculate the implied fair value of goodwill to measure an impairment charge. Instead, entities will be required to record an impairment charge based on the excess of a reporting unit’s carrying value over its fair value. ASU 2017-04 is effective for financial statements issued for fiscal years beginning after December 15, 2019. The Company is currently evaluating the potential impact of the adoption of ASU 2017-04 on the Company's consolidated financial statements.

 

In May 2017, the FASB issued ASU No. 2017-09, Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting (“ASU 2017-09”). ASU 2017-09 amends the scope of modification accounting for share-based payment arrangements. The guidance requires modification accounting only if the fair value, vesting conditions, or the classification of the award (as equity or liability) changes as a result of a change in terms or conditions. ASU 2017-09 is effective for financial statements issued for fiscal years beginning after December 15, 2017. The Company is currently evaluating the potential impact of the adoption of ASU 2017-09 on the Company's consolidated financial statements.

 

 

3.     Net Income (Loss) per Share

 

Basic net income (loss) per share is computed by dividing net income (loss) attributable to common stockholders by the weighted average number of shares of common stock of the Company outstanding during the period. The Company computed net income (loss) per share of common stock using the treasury stock method for the three and nine months ended September 30, 2017, and using the two-class method required for participating securities for the three and nine months ended September 30, 2016. The Company considered its redeemable convertible preferred stock to be participating securities as the holders of the preferred stock were entitled to receive a dividend in the event that a dividend was paid on common stock. Diluted net income (loss) per share is computed by dividing net income (loss) attributable to common stockholders by the weighted average number of shares of common stock during the period plus

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TABULA RASA HEALTHCARE, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except share and per share data)

 

the impact of dilutive securities, to the extent that they are not anti-dilutive. The following table presents the calculation of basic and diluted net income (loss) per share for the Company’s common stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30, 

 

September 30, 

 

 

    

2017

    

2016

    

2017

    

2016

    

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

7,695

 

$

(142)

 

$

3,350

 

$

(219)

 

Decretion of redeemable convertible preferred stock

 

 

 —

 

 

2,641

 

 

 —

 

 

2,439

 

Undistributed income attributable to redeemable convertible preferred stockholders

 

 

 —

 

 

(1,271)

 

 

 —

 

 

(1,140)

 

Net income (loss) attributable to common stockholders, basic

 

$

7,695

 

$

1,228

 

$

3,350

 

$

1,080

 

Decretion of redeemable convertible preferred stock

 

 

 —

 

 

(2,641)

 

 

 —

 

 

(2,439)

 

Revaluation of warrant liability, net of tax

 

 

 —

 

 

(661)

 

 

 —

 

 

(675)

 

Adjustment to undistributed income attributable to redeemable convertible preferred stockholders

 

 

 —

 

 

1,271

 

 

 —

 

 

1,140

 

Net income (loss) attributable to common stockholders, diluted

 

$

7,695

 

$

(803)

 

$

3,350

 

$

(894)

 

Denominator (basic):

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares of common stock outstanding, basic

 

 

16,699,102

 

 

4,918,885

 

 

16,483,169

 

 

4,817,285

 

Denominator (diluted):

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares of common stock outstanding

 

 

16,699,102

 

 

4,918,885

 

 

16,483,169

 

 

4,817,285

 

Effect of potential dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average dilutive effect of stock options

 

 

1,235,883

 

 

 —

 

 

1,308,202

 

 

 —

 

Weighted average dilutive effect of restricted shares

 

 

711,046

 

 

 

 

 

607,988

 

 

 —

 

Weighted average dilutive effect of common shares from warrants

 

 

 —

 

 

 —

 

 

12,441

 

 

 —

 

Dilutive effect from preferred stock and preferred stock warrants assuming conversion

 

 

 —

 

 

5,414,838

 

 

 —

 

 

5,414,765

 

Weighted average shares of common stock outstanding, diluted

 

 

18,646,031

 

 

10,333,723

 

 

18,411,800

 

 

10,232,050

 

Net income per share attributable to common stockholders, basic

 

$

0.46

 

$

0.25

 

$

0.20

 

$

0.22

 

Net income (loss) per share attributable to common stockholders, diluted

 

$

0.41

 

$

(0.08)

 

$

0.18

 

$

(0.09)

 

 

The following potential common shares, presented based on amounts outstanding at each period end, were excluded from the calculation of diluted net income (loss) per share attributable to common stockholders for the periods indicated because including them would have had an anti-dilutive effect:

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30, 

 

September 30, 

 

 

    

2017

    

2016

    

2017

    

2016

    

Stock options to purchase common stock

 

 —

 

2,723,193

 

 —

 

2,723,193

 

Restricted stock

 

 —

 

722,646

 

 —

 

722,646

 

Common stock warrants

 

 —

 

213,806

 

 —

 

213,806

 

 

 

 —

 

3,659,645

 

 —

 

3,659,645

 

 

On October 4, 2016, the Company closed its IPO in which the Company issued and sold 4,300,000 shares of common stock, plus the exercise of the underwriters’ option to purchase an additional 645,000 shares, at an issuance price of $12.00 per share. See Notes 1 and 13 for additional information.

 

 

 

 

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TABULA RASA HEALTHCARE, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except share and per share data)

 

4.     Acquisitions

 

SinfoníaRx

 

On September 6, 2017, the Company, TRCRD, Inc., a Delaware corporation and wholly-owned subsidiary of the Company (“Merger Sub I”), and TRSHC Holdings, LLC, a Delaware limited liability company and a wholly-owned subsidiary of the Company (“Merger Sub II,” and together with Merger Sub I, the “Merger Subs”), entered into, and consummated the transactions contemplated by, an Agreement and Plan of Merger (the “Merger Agreement”), by and among the Company, the Merger Subs, Sinfonía HealthCare Corporation, a Delaware corporation (“Sinfonía”), Michael Deitch, Fletcher McCusker and Mr. Deitch in his capacity as the Stockholders’ Representative. Under the terms of the Merger Agreement, the Company acquired the SinfoníaRx business (“SRx”) as a result of Merger Sub I merging with and into Sinfonía, with Sinfonía surviving as a wholly-owned subsidiary of the Company (the “First Merger”), and, immediately following the First Merger, Sinfonía merging with and into Merger Sub II, with Merger Sub II surviving as a wholly-owned subsidiary of the Company. The SRx business provides MTM technology and services for Medicare, Medicaid, and commercial health plans.

 

The consideration for the acquisition of SRx was comprised of (i) cash consideration of $35,000 paid upon closing, subject to certain customary post-closing adjustments, in each case upon the terms and subject to the conditions contained in the Merger Agreement; (ii) common stock consideration issued upon closing valued at $11,541; and (iii) contingent purchase price consideration with a preliminary estimated fair value of $26,406 to be paid 50% in cash and 50% in the Company’s common stock, subject to adjustments as set forth in the Merger Agreement, based on the achievement of certain performance goals for each of the twelve-month periods ended December 31, 2017 and December 31, 2018. In addition, the Company is not obligated to pay more than $35,000 in cash and the Company’s common stock for the first contingent payment, or more than $130,000 for the aggregate overall closing consideration (not taking into account certain adjustments set forth in the Merger Agreement) and contingent payments. A portion of the cash merger consideration is being held in escrow to secure potential claims by the Company for indemnification under the Merger Agreement and in respect of adjustments to the acquisition consideration.

 

The Company issued 520,821 shares of the Company’s common stock valued at $19.20 per share in satisfaction of the stock consideration issued at closing. The value for the stock consideration issued was calculated based on the arithmetic average of the daily volume-weighted average trading price per share of the Company’s common stock for the 20 trading days ended on and including the trading day prior to the date of the Merger Agreement, using trading prices reported on the NASDAQ Global Market. The stock consideration issued at the closing of the acquisition had an acquisition-date fair value of $11,541.

 

In connection with the acquisition of SRx, the Company incurred direct acquisition costs of $949, which are recorded in general and administrative expenses in the consolidated statements of operations.

 

The Company, with the assistance of a third-party appraiser, utilized a Monte Carlo simulation to determine the estimated acquisition-date fair value of the acquisition-related contingent consideration of $26,406. The fair value measurement was based on significant inputs not observable in the market and thus represents a Level 3 measurement within the fair value hierarchy.

 

The following table summarizes the purchase price consideration based on the estimated acquisition-date fair value of the acquisition consideration:

 

 

 

 

 

Cash consideration at closing, net of post-closing adjustments

    

$

34,670

Stock consideration at closing

    

 

11,541

Estimated fair value of contingent consideration

 

 

26,406

Total fair value of acquisition consideration

 

$

72,617

 

 

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TABULA RASA HEALTHCARE, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except share and per share data)

 

The following table summarizes the preliminary allocation of the purchase price based on the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition:

 

 

 

 

 

Cash

    

$

218

Accounts receivable

    

 

8,309

Prepaid expenses and other current assets

 

 

1,001

Property and equipment

 

 

1,419

Other assets

 

 

94

Trade name

 

 

4,429

Developed technology

 

 

12,640

Client relationships

 

 

19,579

Non-competition agreement

 

 

4,497

Goodwill

 

 

41,439

Total assets acquired 

 

$

93,625

 

 

 

 

Accrued expenses and other liabilities

 

 

(2,667)

Trade accounts payable

 

 

(8,769)

Debt assumed

 

 

(675)

Deferred income tax liability

 

 

(8,897)

Total purchase price, including contingent consideration of $26,406

 

$

72,617

 

The purchase price was allocated to the tangible assets and identifiable intangible assets acquired and liabilities assumed based on their acquisition-date estimated fair values. The identifiable intangible assets principally included a trade name, developed technology, client relationships, and a non-competition agreement, each of which are subject to amortization on a straight-line basis being amortized over a weighted average of 10, 8, 7.56 and 5 years, respectively. The weighted average amortization period for acquired intangible assets as of the date of acquisition is 7.68 years.

 

The Company, with the assistance of a third-party appraiser, assessed the fair value of the assets of SRx. The fair values of the trademarks and technology were estimated using the relief from royalty method. The Company, with the assistance of a third party appraiser, derived the hypothetical royalty income from the projected revenues of SRx. The fair value of client relationships was estimated using a multi period excess earnings method. To calculate fair value, the Company, with the assistance of a third party appraiser, used cash flows discounted at a rate considered appropriate given the inherent risks associated with each client grouping. The fair value of the non-competition agreement was estimated using the differential approach which involves valuing the business under two different scenarios. The first valuation assumes the non-compete agreement is in place and the second valuation assumes that it is not. The difference in the value of the business under each approach is attributed to the non-compete agreement.

 

The useful lives of the intangible assets were estimated based on the expected future economic benefit of the assets and is being amortized over the estimated useful life in proportion to the economic benefits consumed using the straight-line method.

 

The amortization of intangible assets is not deductible for income tax purposes.

 

The Company believes the goodwill related to the acquisition was a result of providing the Company exposure to a larger customer base that will enable the Company to leverage its technology in the broader market, as well as offering cross-selling market exposure opportunities. The goodwill is not deductible for income tax purposes.

 

Revenue from SRx is recorded primarily based on a fixed monthly fee for each eligible member, or per member per month, in the respective programs. Revenue from SRx is also comprised of transactional fees based on a fixed fee per comprehensive medication review. Revenue for these services and the related costs are recognized each month as the services are performed and costs are incurred, and are included in service revenue and cost of revenue – service cost, respectively, in the consolidated statements of operations. For the three and nine months ended September 30, 2017,

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TABULA RASA HEALTHCARE, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except share and per share data)

 

service revenue of $2,638 and net income of $285 from SRx were included in the Company’s consolidated statements of operations since the acquisition date.

 

The fair value of the assets and liabilities related to the acquisition of SRx are based on a preliminary valuation report. The Company continues to evaluate the fair value of certain assets and liabilities related to the acquisition, including the measurement technique used to value the contingent consideration. Additional information, which existed as of the acquisition date but was at that time unknown to the Company, may become known during the remainder of the measurement period. Changes to amounts recorded as a result of the final valuation may result in a corresponding adjustment to these assets and liabilities, including goodwill. The determination of the estimated fair values of all assets acquired is expected to be completed within one year from the date of acquisition.

 

IntermedRx

 

On September 15, 2016, the Company acquired certain assets, consisting primarily of intellectual property and software assets of 9176-1916 Quebec Inc. (an entity indirectly controlled by our Chief Scientific Officer, Jacques Turgeon). The intellectual property and software assets were previously licensed by us and are integrated into the Company’s Medication Risk Mitigation Matrix. The purchase price consisted of cash consideration of $6,000, consisting of $1,000 which was paid upon closing, $4,400 paid during the fourth quarter of 2016, $550 paid on September 15, 2017, and $50 paid during the fourth quarter of 2017. In addition to the cash consideration, the purchase price included an aggregate of $5,000 worth of common stock, which amounted to the issuance of 395,407 shares of common stock during the fourth quarter of 2016.

 

The deferred acquisition cash consideration of $5,000 was recorded at its acquisition-date fair value of $4,955, using an assumed cost of debt of 7.8%. The $45 discount was amortized to interest expense using the effective interest method through the consideration payment date. The Company amortized $10 and $2 of the discount to interest expense for the three months ended September 30, 2017 and 2016, respectively. The Company amortized $32 and $2 of the discount to interest expense for the nine months ended September 30, 2017 and 2016, respectively. These amounts are included in acquisition-related consideration payable in the consolidated balance sheets as of September 30, 2017. As of September 30, 2017, the acquisition-related consideration payable balance was $50.

 

Proforma

 

The unaudited pro forma results presented below include the results of the SRx acquisition and the 9176-1916 Quebec Inc. acquisition as if they had been consummated as of January 1, 2016. The unaudited pro forma results include the amortization associated with acquired intangible assets, interest expense on the debt incurred to fund these acquisitions, insurance expense for additional required business insurance coverage, stock compensation expense related to options granted to the employees of SRx at the closing of the acquisition, and the estimated tax effect of adjustments to income before income taxes. Material nonrecurring charges directly attributable to the transactions are excluded, and consisted of direct acquisition costs of $855 and $949 for the three and nine months ended September 30, 2017, respectively. In addition, the unaudited pro forma results do not include any expected benefits of the acquisitions. Accordingly, the unaudited pro forma results are not necessarily indicative of either future results of operations or results that might have been achieved had the acquisitions been consummated as of January 1, 2016.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Three Months Ended

 

Nine Months Ended

 

Nine Months Ended

 

 

 

September 30, 

 

September 30, 

 

September 30, 

 

September 30, 

 

 

    

2017

 

2016

 

2017

 

2016

    

Revenue

 

$

39,420

 

$

31,266

 

$

112,079

 

$

85,336

 

Net loss

 

 

(727)

 

 

(1,332)

 

 

(5,098)

 

 

(4,259)

 

Net income (loss) per share attributable to common stockholders, basic

 

 

(0.04)

 

 

0.12

 

 

(0.30)

 

 

(0.32)

 

Net loss per share attributable to common stockholders, diluted

 

 

(0.04)

 

 

(0.17)

 

 

(0.30)

 

 

(0.44)

 

 

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TABULA RASA HEALTHCARE, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except share and per share data)

 

 

 

 

5.       Property and Equipment

 

              Depreciation and amortization expense on property and equipment for the three months ended September 30, 2017 and 2016 was $542 and $359, respectively. Depreciation and amortization expense on property and equipment for the nine months ended September 30, 2017 and 2016 was $1,396 and $889, respectively.

 

 

6.       Software Development Costs

 

              The Company capitalizes certain costs incurred in connection with obtaining or developing internal-use software, including external direct costs of material and services and payroll costs for employees directly involved with the software development. As of September 30, 2017 and December 31, 2016, capitalized software costs consisted of the following:

 

 

 

 

 

 

 

 

September 30, 2017

    

December 31, 2016

Software development costs

$

8,652

 

$

6,501

Less:  accumulated amortization

 

(4,388)

 

 

(3,151)

Software development costs, net

$

4,264

 

$

3,350

 

 

 

 

 

 

Capitalized software costs not yet subject to amortization

$

2,421

 

$

911

 

Amortization expense for the three months ended September 30, 2017 and 2016 was $426 and $302, respectively. Amortization expense for the nine months ended September 30, 2017 and 2016 was $1,237 and $757, respectively.

 

 

7.      Goodwill and Intangible Assets

 

The Company’s goodwill and related changes during the nine months ended September 30, 2017 are as follows:

 

 

 

 

 

Balance at January 1, 2017

    

$

21,686

Goodwill from 2017 acquisition

 

 

41,439

Balance at September 30, 2017

 

$

63,125

 

Goodwill is not amortized, but instead tested for impairment annually. The Company conducted its annual impairment test as of October 1, 2016 and determined that there were no indicators of impairment during 2016. The next annual impairment test will be conducted as of October 1, 2017, unless the Company identifies a triggering event in the interim. Management has not identified any triggering events during the nine months ended September 30, 2017.

 

 

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TABULA RASA HEALTHCARE, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except share and per share data)

 

Intangible assets consisted of the following as of September 30, 2017 and December 31, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted Average

 

 

 

 

 

 

 

 

 

 

 

 

Amortization Period

 

 

 

 

Accumulated

 

Intangible

 

 

    

(in years)

    

Gross Value

    

Amortization

    

Assets, net

 

September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

Trade names

 

8.48

 

$

6,369

 

$

(1,102)

 

$

5,267

 

Client relationships

 

8.56

 

 

34,263

 

 

(4,528)

 

 

29,735

 

Non-competition agreements

 

4.95

 

 

5,149

 

 

(465)

 

 

4,684

 

Developed technology

 

7.87

 

 

26,140

 

 

(2,504)

 

 

23,636

 

Domain name

 

10.00

 

 

29

 

 

(4)

 

 

25

 

Total intangible assets

 

 

 

$

71,950

 

$

(8,603)

 

$

63,347

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted Average

 

 

 

 

 

 

 

 

 

 

 

 

Amortization Period

 

 

 

 

Accumulated

 

Intangible

 

 

    

(in years)

    

Gross Value

    

Amortization

    

Assets, net

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

Trade names

 

5.00

 

$

1,940

 

$

(791)

 

$

1,149

 

Client relationships

 

10.02

 

 

14,684

 

 

(3,289)

 

 

11,395

 

Non-competition agreements

 

4.64

 

 

652

 

 

(326)

 

 

326

 

Developed technology

 

7.76

 

 

13,500

 

 

(1,101)

 

 

12,399

 

Domain name

 

10.00

 

 

29

 

 

(1)

 

 

28

 

Total intangible assets

 

 

 

$

30,805

 

$

(5,508)

 

$

25,297

 

 

Amortization expense for intangible assets for the three months ended September 30, 2017 and 2016 was $1,198 and $614, respectively. Amortization expense for intangible assets for the nine months ended September 30, 2017 and 2016 was $3,095 and $1,767, respectively.

 

The estimated amortization expense for each of the next five years and thereafter is as follows:

 

 

 

 

 

Years Ending December 31, 

    

 

 

2017 (October 1 - December 31)

    

$

2,398

2018

 

 

9,557

2019

 

 

9,115

2020

 

 

8,776

2021

 

 

8,763

Thereafter

 

 

24,738

Total estimated amortization expense

 

$

63,347

 

 

 

 

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Table of Contents

TABULA RASA HEALTHCARE, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except share and per share data)

 

8.       Accrued Expenses and Other Liabilities

 

At September 30, 2017 and December 31, 2016, accrued expenses and other liabilities consisted of the following:

 

 

 

 

 

 

 

 

 

 

    

September 30, 2017

    

December 31, 2016

 

Employee related expenses

 

$

4,634

 

$

1,174

 

Deferred revenue

 

 

1,526

 

 

851

 

Contract labor

 

 

733

 

 

 —

 

Interest

 

 

115

 

 

16

 

Deferred rent

 

 

150

 

 

13

 

Professional fees

 

 

169

 

 

 —

 

Income taxes payable

 

 

281

 

 

27

 

Other expenses

 

 

493

 

 

78

 

Total accrued expenses and other liabilities

 

$

8,101

 

$

2,159

 

 

 

 

 

 

 

 

9.      Notes Payable Related to Acquisition

 

In December 2014, the Company acquired all of the authorized, issued and outstanding equity interests of Medliance LLC ("Medliance"), which provides pharmacy cost management services through data analytics. As part of the acquisition-related consideration of the Medliance acquisition, the Company issued multiple subordinated convertible promissory notes (the "Medliance Notes") to the owners of Medliance for aggregate borrowings of $16,385. Interest was 8% and compounded annually. On July 1, 2016, the Company repaid the Medliance Notes with the proceeds from a long-term credit facility. Interest expense was $706 for the nine months ended September 30, 2016. No interest expense was recorded for the three months ended September 30, 2016.

 

The Company recorded the Medliance Notes at their aggregate acquisition date fair values of $14,347 and the notes were accreted up to their face values of $16,385 over the 18 month term using the effective-interest method. For the nine months ended September 30, 2016, the Company amortized $755 of the discount to interest expense. No expense was recorded for the three months ended September 30, 2016.

 

 

10.      Lines of Credit and Long-Term Debt

 

(a)    Lines of Credit

 

On July 1, 2016, the Company entered into a Loan and Security Modification Agreement (the "Amended 2015 Revolving Line") with Western Alliance Bank, successor in interest to Bridge Bank, National Association (“Bridge Bank”), whereby the Company’s revolving line of credit, entered into with Bridge Bank in 2015, was amended to increase the Company's borrowing availability to up to $25,000 and extend the maturity date to July 1, 2018. The Company's ability to borrow under the Amended 2015 Revolving Line was based upon a specified borrowing base equal to the Company's trailing four months of monthly recurring revenue, as defined, from eligible recurring revenue contracts, as defined, through March 31, 2017 and based upon the Company's trailing three months of monthly recurring revenue, as defined, from eligible recurring revenue contracts, as defined, thereafter. Interest on the Amended 2015 Revolving Line was also amended to be calculated at a variable rate based upon Western Alliance Bank's prime rate plus 0.5%, with Western Alliance Bank's prime rate having a floor of 3.5%. Financial covenants under the Amended 2015 Revolving Line required that the Company (i) maintain an unrestricted cash and unused availability balance under the Amended 2015 Revolving Line of at least $3,000 at all times (the liquidity covenant), (ii) maintain a minimum EBITDA, as defined, of $2,500 for the quarter ending December 31, 2016 and thereafter, and (iii) maintain a minimum monthly recurring revenue retention rate of at least 90%, measured quarterly.

 

 

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TABULA RASA HEALTHCARE, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except share and per share data)

 

On September 6, 2017, in connection with the acquisition of SRx, the Company entered into an Amended and Restated Loan and Security Agreement (the “Amended and Restated 2015 Revolving Line”) whereby the Amended 2015 Revolving Line was amended to extend the maturity date to September 6, 2020, and increase the Company's borrowing availability to up to $40,000 with a $1,000 sublimit for cash management services and letters of credit and foreign exchange transactions. The Company may also request an increase in the Amended and Restated 2015 Revolving Line of up to $10,000 upon the successful syndication of such additional amounts.

 

Interest on the Amended and Restated 2015 Revolving Line was also amended to be calculated at a variable rate based upon Western Alliance Bank's prime rate plus an applicable margin which will range from (0.25%) to 0.25% depending on the Company’s leverage ratio, with Western Alliance Bank's prime rate having a floor of 3.5%. Financial covenants under the Amended and Restated 2015 Revolving Line require that the Company (i) maintain an unrestricted cash and unused availability balance under the Amended and Restated 2015 Revolving Line of at least $3,000 at all times (the liquidity covenant), (ii) maintain a leverage ratio of less than 2.50:1.00, on a trailing twelve-month basis starting with the twelve-month period ending December 31, 2017, measured quarterly, and (iii) maintain a minimum quarterly EBITDA starting with the quarter ending December 31, 2017 and each quarter thereafter, of at least 75% of the plan approved by the Company’s Board of Directors (the “Board”). In addition, the Company may not contract to make capital expenditures, excluding capitalized software development costs and tenant leasehold improvements, greater than $5,000 in any fiscal year without the consent of Western Alliance Bank. As of September 30, 2017, the Company was in compliance with all of the financial covenants related to the Amended and Restated 2015 Revolving Line, and management expects that the Company will be able to maintain compliance with the financial covenants.

 

In September 2015, the Company arranged for Bridge Bank to issue a $500 letter of credit on its behalf in connection with the Company’s lease agreement for the office space in Moorestown, NJ. The letter of credit was issued under the Amended and Restated 2015 Revolving Line. The letter of credit renews annually and expires in September 2027 and reduces amounts available on the line of credit. See Note 16 for additional information.

 

As of September 30, 2017, there was $35,000 outstanding under the Amended and Restated 2015 Revolving Line, and amounts available for borrowings under the Amended and Restated 2015 Revolving Line was $4,500.

 

As of September 30, 2017, the interest rate on the Amended and Restated 2015 Revolving Line was 4.31% and interest expense was $100 for the three and nine months ended September 30, 2017. As of September 30, 2016, the interest rate on the Amended and Restated 2015 Revolving Line was 4.56% and interest expense was $169 and $449 for the three and nine months ended September 30, 2016, respectively. In connection with the Amended and Restated 2015 Revolving Line (and all predecessor agreements prior to the amendment or the amendment and restatement thereof), the Company recorded deferred financing costs of $413. The Company is amortizing the deferred financing costs to interest expense using the effective-interest method over the term of the Amended and Restated 2015 Revolving Line and amortized $16 and $9 to interest expense for the three months ended September 30, 2017 and 2016, respectively, and $40 and $36 to interest expense for the nine months ended September 30, 2017 and 2016, respectively.

 

 

(b)    Capital Lease Obligations

 

The following table represents the total capital lease obligations of the Company at September 30, 2017 and December 31, 2016:

 

 

 

 

 

 

 

 

 

 

    

September 30, 2017

    

December 31, 2016

 

Capital leases

 

$

1,946

 

$

1,746

 

Less current portion, net

 

 

(927)

 

 

(674)

 

Total capital leases, less current portion, net

 

$

1,019

 

$

1,072

 

 

The Company has entered into leases for certain equipment and software, which are recorded as capital lease obligations. These leases have annual interest rates ranging from 6% to 19%. Interest expense related to the capital leases was $49 and $56 for the three months ended September 30, 2017 and 2016, respectively. Interest expense related

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TABULA RASA HEALTHCARE, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except share and per share data)

 

to the capital leases was $158 and $148 for the nine months ended September 30, 2017 and 2016, respectively.

 

Amortization of assets held under capital leases is included in depreciation and amortization expense. The net book value of equipment and software acquired under capital lease was $2,213 and $2,364 as of September 30, 2017 and December 31, 2016, respectively, and are reflected in property and equipment on the consolidated balance sheets.

 

(c)    Long-Term Debt Maturities

 

As of September 30, 2017, the Company's long-term debt consisted of capital lease obligations and is payable as follows:

 

 

 

 

 

Total

 

long-term

 

debt

Remainder of 2017

$

293

2018

 

1,065

2019

 

725

2020

 

116

2021

 

 5

 

 

2,204

Less amount representing interest

 

(258)

Present value of payments

 

1,946

Less current portion

 

(927)

Total long-term debt, net of current portion

$

1,019

 

(d)    Other Financing

 

In May 2016, the Company signed a prime vendor agreement with AmerisourceBergen Drug Corporation, which was effective March 2016 and requires a monthly minimum purchase obligation of approximately $1,750. The Company fully expects to meet this requirement. This agreement was subsequently amended and restated effective May 1, 2016 with a three-year term expiring April 2019. As of September 30, 2017 and December 31, 2016, the Company had $3,839 and $3,327, respectively, due to AmerisourceBergen Drug Corporation as a result of prescription drug purchases. Pursuant to the terms of a security agreement entered into in connection with the prime vendor agreement, AmerisourceBergen also holds a subordinated security interest in all of the Company’s assets.

 

 

11.      Income Taxes

 

For the nine months ended September 30, 2017, the Company recorded an income tax benefit of $7,845. During the third quarter of 2017, in conjunction with the acquisition of SRx, the Company recognized a net deferred tax liability of $8,897 primarily related to intangible assets other than goodwill. The Company determined that the deferred tax liabilities related to the acquisition provide sufficient sources of recoverability to realize the Company’s deferred tax assets associated with those jurisdictions that file consolidated returns. As a result, the Company released $6,590 of its deferred tax asset valuation allowance and recognized an additional benefit of $2,830 related to tax windfall benefits generated in the nine months ended September 30, 2017. These tax benefits were partially offset by tax expense of $1,463 recorded based on the estimated annual effective tax rate expected for the full year.

 

For the nine months ended September 30, 2016, the Company recognized tax expense of $11, which resulted in an effective tax rate of (5.3)%. For the nine months ended September 30, 2016, the Company recorded the tax provision based on the estimated annual effective tax rate expected for the full year which included current Federal alternative minimum tax, current state taxes and deferred tax expense associated with indefinite-lived deferred tax liabilities for goodwill amortization, in addition to a change in the valuation allowance related to deferred tax assets for income generated in the current period.

 

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TABULA RASA HEALTHCARE, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except share and per share data)

 

12.      Other Long-term Liabilities

 

Other long term liabilities as of September 30, 2017 and December 31, 2016 consisted of $2,637 and $2,205, respectively, which represents the long-term portion of deferred rent primarily related to the Company's operating leases for office space in Moorestown, NJ and a new space in South Carolina dedicated to software development, which the Company began to occupy in June 2017.

 

 

13.     Stockholders' Equity

 

(a)    Capitalization and Initial Public Offering

 

On October 4, 2016, the Company closed its IPO in which the Company issued and sold 4,300,000 shares of common stock, plus the exercise of the underwriters’ option to purchase an additional 645,000 shares of common stock, at an issuance price of $12.00 per share. The Company received net proceeds of $55,186 after deducting underwriting discounts and commissions of $4,154 but before deducting other offering expenses. In addition, upon the closing of the IPO, all of the Company’s then outstanding Class A Non-Voting common stock and Class B Voting common stock, totaling 5,583,405 shares, were automatically redesignated into shares of common stock, and all of the Company’s then outstanding convertible preferred stock converted into an aggregate of 5,089,436 shares of common stock.

 

Upon completion of the IPO on October 4, 2016, the Company filed an amended and restated certificate of incorporation to, among other things, state that the aggregate number of shares of stock that the Company is authorized to issue is 100,000,000 shares of common stock, par value $.0001 per share, and 10,000,000 shares of undesignated preferred stock, par value $.0001 per share.

 

(b)    Common Stock Warrants

 

During the nine months ended September 30, 2017, 28,431 shares of common stock were issued upon the net exercise of 32,216 warrants to purchase common stock at an exercise price of $1.55 per share. As of September 30, 2017, no warrants to purchase shares of common stock were outstanding. During the nine months ended September 30, 2016, the Company issued 210,817 shares of common stock upon the net exercise of warrants to purchase 232,787 shares of common stock.

 

(c)    Common Stock Repurchase

 

On April 25, 2017 the Board authorized the Company to repurchase up to $5,000 of its common stock at prevailing market prices, from time to time, through open market, block and privately-negotiated transactions, at such times and in such amounts as management deems appropriate. The Company funds repurchases of its common stock through a combination of cash on hand, cash generated by operations or borrowings under the Amended and Restated 2015 Revolving Line. During the nine months ended September 30, 2017, the Company repurchased 73,466 shares at an average price of $13.05 per share for a total of $959. As of September 30, 2017, $4,041 of common stock remained available for repurchase.

 

 

14.     Stock-Based Compensation

 

In September 2016, the Company adopted the 2016 Equity Compensation Plan (the “2016 Plan”) and merged the 2014 Equity Compensation Plan (the “2014 Plan”) into the 2016 Plan on September 28, 2016. No additional grants were made thereafter under the 2014 Plan. Outstanding grants under the 2014 Plan will continue in effect according to their terms as in effect before the merger with the 2016 Plan, and the shares with respect to outstanding grants under the 2014 Equity Plan will be issued or transferred under the 2016 Plan. The 2016 Plan authorizes the issuance or transfer of up to the sum of the following: (1) 800,000 new shares, plus (2) the number of shares of common stock subject to outstanding grants under the 2014 Equity Plan as of the effective date of the 2016 Plan; provided, however, that the

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TABULA RASA HEALTHCARE, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except share and per share data)

 

aggregate number of shares of the Company’s common stock that may be issued or transferred under the 2016 Plan pursuant to incentive stock options may not exceed 800,000. During the term of the 2016 Plan, the share reserve will automatically increase on the first trading day in January of each calendar year, beginning in calendar year 2017, by an amount equal to the lesser of 5% of the total number of outstanding shares of common stock on the last trading day in December of the prior calendar year or such other number set by the Board. During 2017, the Board approved an increase of 831,423 shares to the share reserve. As of September 30, 2017, 459,368 shares were available for future grants under the 2016 Plan.

 

The option price per share cannot be less than the fair market value of a share on the date the option was granted, and in the case of incentive stock options granted to an employee owning more than 10% of the total combined voting power of all classes of stock of the Company, the option price shall not be less than 110% of the fair market value of Company stock on the date of grant. Stock option grants under the Plan generally expire 10 years from the date of grant, other than incentive stock option grants to 10% shareholders, which have a 5 year term, 90 days after termination, or one year after the date of death or termination due to disability. Stock options generally vest over a period of four years, with 25% of the options becoming exercisable on the one-year anniversary of the commencement date and the remaining shares vesting monthly thereafter for 36 months in equal installments of 2.08% per month.

 

Employee Restricted Common Stock

 

On September 28, 2016, the Board granted 700,386 shares of restricted common stock to certain Company employees, including executive officers, under the 2014 Plan, prior to merging it with the 2016 Plan, pursuant to a special equity award pool previously approved by the Board which was made immediately prior to the effectiveness of the Company's registration statement filed in connection with the Company's IPO. The value of the grants is based on the IPO price of $12.00 per share and the related non-cash compensation expense was being recognized ratably over the vesting period from the date of grant through May 31, 2017, when the shares underlying the grant were scheduled to fully vest. For the nine months ended September 30, 2017, $5,159 of expense was recognized related to this grant. No expense was recognized for the three months ended September 30, 2017. For the three and nine months ended September 30, 2016, $102 of expense was recognized related to this grant. As of September 30, 2017, there was no unrecognized compensation expense related to this grant. On June 12, 2017, the Company entered into an amendment with each recipient of this grant to amend the vesting date from May 31, 2017 to May 31, 2018.

 

On August 3, 2017, the Board granted 20,000 shares of restricted common stock to a non-executive employee of the Company, pursuant to the 2016 Plan, which will vest in four substantially equal annual installments over the four years following the grant date. The value of the grant is based on the grant date fair value of the Company’s common stock of $14.56 per share. For the three and nine months ended September 30, 2017, $12 of expense was recognized related to this grant. As of September 30, 2017, there was unrecognized compensation expense of $279 related to this grant.

 

Non-Employee Director Restricted Common Stock

 

On September 28, 2016, the Company granted 22,260 shares of restricted common stock under the 2016 Plan to its non-employee directors, which represents both the initial and annual grants to such directors. The initial grant (“Initial Grant”) will vest in three substantially equal annual installments over three years following the grant date and the annual grant (“2016 Annual Grant”) will vest in full on the earlier of the next annual shareholder meeting or the one year anniversary of the grant date. The value of the grants is based on the IPO price of $12.00 per share.

 

On March 8, 2017, the Company granted 5,212 shares of restricted common stock under the 2016 Plan to a newly appointed non-employee director, which represents such director’s initial grant and will vest in three substantially equal annual installments over three years following the grant date. The value of the grant is based on the grant date fair value of the Company’s common stock of $13.68 per share.

 

On June 16, 2017, the Company granted 10,384 shares of restricted common stock (“2017 Annual Grant”) to its non-employee directors, which will vest in full on the earlier of the next annual shareholder meeting or the one year

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TABULA RASA HEALTHCARE, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except share and per share data)

 

anniversary of the grant date. The value of the grant is based on the grant date fair value of the Company’s common stock of $13.54 per share.

 

On June 16, 2017, the date of the Company’s annual shareholder meeting, the 2016 Annual Grant, which in the aggregate equaled 7,420 shares, fully vested and were no longer subject to forfeiture. In addition, on September 28, 2017, 4,944 shares of the Initial Grant vested and were no longer subject to forfeiture.

 

For the three and nine months ended September 30, 2017, $56 and $165 of expense was recognized related to these non-employee director grants, respectively. For the three and nine months ended September 30, 2016, $1 of expense was recognized related to these grants. As of September 30, 2017, there was unrecognized compensation expense of $276 related to these grants.

 

Stock Options

 

The Company recorded $871 and $120 of stock-based compensation expense related to the vesting of employee and non-employee stock options for the three months ended September 30, 2017 and 2016, respectively. The Company recorded $2,440 and $378 of stock-based compensation expense related to the vesting of employee and non-employee stock options for the nine months ended September 30, 2017 and 2016, respectively.

 

The estimated fair value of options granted was calculated using a Black-Scholes option-pricing model. The computation of expected life for employees was determined based on the simplified method. The risk-free rate is based on the U.S. Treasury security with terms equal to the expected time of exercise as of the grant date. The Company's common stock had not been publicly traded until the IPO commenced on September 29, 2016; therefore, expected volatility is based on the historical volatilities of selected public companies whose services are comparable to that of the Company. The table below sets forth the weighted average assumptions for employee grants during the nine months ended September 30, 2017 and 2016:

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

September 30, 

Valuation assumptions:

    

2017

    

    

2016

 

Expected volatility

 

61.00

%  

 

59.00

%

Expected term (years)

 

6.03

 

 

6.08

 

Risk-free interest rate

 

2.21

%  

 

1.49

%

Dividend yield

 

 —

 

 

 —

 

 

The weighted average grant date fair value of employee options granted during the nine months ended September 30, 2017 and 2016 was $8.13 and $7.29 per share, respectively.

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TABULA RASA HEALTHCARE, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except share and per share data)

 

 

The following table summarizes stock option activity under the 2016 Plan for the nine months ended September 30, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

Weighted

 

average

 

 

 

 

 

 

 

average

 

remaining

 

Aggregate

 

 

Number

 

exercise

 

contractual

 

intrinsic

 

    

of shares

    

price

    

term

    

value

Outstanding at December 31, 2016

 

3,059,690

 

$

5.14

 

 

  

 

 

Granted

 

1,044,556

 

 

14.43

 

 

 

 

 

Exercised

 

(1,054,764)

 

 

3.21

 

 

 

 

 

Forfeited

 

(49,629)

 

 

10.52

 

 

 

 

 

Outstanding at September 30, 2017

 

2,999,853

 

$

8.97

 

7.3

 

$

53,340

Options vested and expected to vest at September 30, 2017

 

2,999,853

 

$

8.97

 

7.3

 

$

53,340

Exercisable at September 30, 2017

 

1,393,742

 

$

3.37

 

5.3

 

$

32,572

 

Included within the above table are 150,212 non-employee options outstanding as of September 30, 2017, of which 345 are unvested as of September 30, 2017 and therefore subject to remeasurement.

 

The aggregate intrinsic value of stock options is calculated as the difference between the exercise price of the stock options and the Company’s closing stock price or estimated fair value on the last trading day of the fiscal quarter for those stock options that had exercise prices lower than the fair value of the Company's common stock. This amount changes based on the fair market value of the Company’s stock. The total intrinsic value of options exercised during the nine months ended September 30, 2017 and 2016 was $11,665 and $832, respectively.

 

As of September 30, 2017, there was $10,022 of total unrecognized compensation cost related to nonvested stock options granted under the 2016 Plan, which is expected to be recognized over a weighted average period of 2.9 years.

 

Cash received from option exercises for the nine months ended September 30, 2017 was $194. During the nine months ended September 30, 2017, 362,440 shares of common stock were delivered by option holders as payment for the exercise price and employee payroll taxes owed for the exercise of 956,327 stock options with a gross exercise value of $3,187. During the nine months ended September 30, 2016, 7,930 shares of common stock were delivered by option holders as payment for the exercise of 71,150 stock options with a gross exercise value of $104. No cash was received from the exercise of stock options for the nine months ended September 30, 2016.

 

The Company recorded total stock-based compensation expense for the three and nine months ended September 30, 2017 and 2016 in the following expense categories of its consolidated statement of operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30, 

 

September 30, 

 

 

    

2017

    

2016

    

2017

    

2016

 

Cost of revenue - product

 

$

138

 

$

27

 

$

359

 

$

85

 

Cost of revenue - service

 

 

91

 

 

 7

 

 

203

 

 

21

 

Research and development

 

 

195

 

 

 9

 

 

515

 

 

30

 

Sales and marketing

 

 

158

 

 

21

 

 

440

 

 

65

 

General and administrative

 

 

357

 

 

159

 

 

6,259

 

 

280

 

 

 

$

939

 

$

223

 

$

7,776

 

$

481

 

 

 

 

24


 

Table of Contents

TABULA RASA HEALTHCARE, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except share and per share data)

 

15.     Fair Value Measurements

 

The Company’s financial instruments consist of accounts receivable, accounts payable, accrued expenses, acquisition-related consideration payable, acquisition-related contingent consideration, and long-term debt. The carrying values of accounts receivable, accounts payable and accrued expenses are representative of their fair value due to the relatively short-term nature of those instruments. The carrying value of the Company’s long-term debt approximates fair value based on the terms of the debt.

 

The Company has classified liabilities measured at fair value on a recurring basis at September 30, 2017 and December 31, 2016 as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurement

 

 

at Reporting Date Using

 

 

 

 

 

 

 

 

 

 

 

Balance as of

 

    

Level 1

    

Level 2

    

Level 3

    

September 30, 2017

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Acquisition-related contingent consideration - short-term

 

 

 —

 

 

 —

 

 

15,224

 

 

15,224

Acquisition-related contingent consideration - long-term

 

 

 —

 

 

 —

 

 

13,652

 

 

13,652

 

 

$

 —

 

$

 —

 

$

28,876

 

$

28,876

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurement

 

 

at Reporting Date Using

 

 

 

 

 

 

 

 

 

 

 

Balance as of

 

    

Level 1

    

Level 2

    

Level 3

    

December 31, 2016

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Acquisition-related contingent consideration - short-term

 

$

 —

 

$

 —

 

$

1,493

 

$

1,493

Acquisition-related contingent consideration - long-term

 

 

 —

 

 

 —

 

 

1,515

 

 

1,515

 

 

$

 —

 

$

 —

 

$

3,008

 

$

3,008

 

Acquisition-related contingent consideration is measured at fair value on a recurring basis using unobservable inputs, hence these instruments represent Level 3 measurements within the fair value hierarchy. The acquisition-related contingent consideration liability represents the estimated fair value of the additional cash and equity consideration payable that is contingent upon the achievement of certain financial and performance milestones.

 

The SRx acquisition-related contingent consideration was recorded at the estimated fair value at the acquisition date of September 6, 2017. The Company, with the assistance of a third-party appraiser, utilized a Monte Carlo simulation to derive at preliminary estimates of the contingent consideration payments. The fair value of the SRx acquisition-related contingent consideration was calculated to be $27,313 as of September 30, 2017. The fair value of the Medliance contingent consideration was calculated to be $1,563 as of September 30, 2017.

 

The changes in fair value of the Company’s acquisition-related contingent consideration for the nine months ended September 30, 2017 was as follows:

 

 

 

 

 

Balance at December 31, 2016

    

 

3,008

Acquisition date fair value of SinfoníaRx contingent consideration

 

 

26,406

Fair value of cash consideration paid

 

 

(1,498)

Adjustments to fair value measurement

 

 

960

Balance at September 30, 2017

 

$

28,876

 

 

 

 

 

 

 

 

 

 

 

 

 

25


 

Table of Contents

TABULA RASA HEALTHCARE, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except share and per share data)

 

16.     Commitments and Contingencies

 

The Company is not currently involved in any significant claims or legal actions that, in the opinion of management, will have a material adverse impact on the Company.

 

As of September 30, 2017 and December 31, 2016, the Company was contingently liable for $500 under an outstanding letter of credit related to the Company’s lease agreement for the office space in Moorestown, NJ. See Note 10 for additional information.

 

 

 

17.     Retirement Plan

 

The Company has established a 401(k) plan that qualifies as a defined contribution plan under Section 401 of the Internal Revenue Code. The Company’s contributions to this plan are based on a percentage of eligible employees’ plan year earnings, as defined. The Company made contributions to participants’ accounts totaling $194 and $128 during the three months ended September 30, 2017 and 2016, respectively. The Company made contributions to participants’ accounts totaling $478 and $230 during the nine months ended September 30, 2017 and 2016, respectively.

 

 

 

 

18.     Employment Agreements and Incentive Arrangements

 

On April 25, 2017, the Company entered into employment agreements with each of the Company’s named executive officers. The employment agreements provide for, among other things, salary, incentive compensation, payments in the event of termination of the executives upon the occurrence of a change in control, and restrictive covenants pursuant to which the executives have agreed to refrain from competing with the Company or soliciting the Company’s employees or customers for a period following the executive’s termination of employment. Each employment agreement is effective as of April 1, 2017, has an initial three year term and will automatically renew each anniversary thereafter.

 

On April 25, 2017, the Company’s Board also adopted the Annual Incentive Plan, effective as of January 1, 2017, which formalizes the Company’s annual short-term incentive program and does not represent a new compensation program for the named executive officers. The Annual Incentive Plan provides pay for performance incentive compensation to the Company’s employees, including its named executive officers, rewarding them for their contributions to the Company with cash incentive compensation based on attainment of pre-determined corporate and individual performance goals, as applicable.

 

 

19.     Related-Party Transactions

 

During 2016, the Company engaged Tunstall Consulting, a corporate financial planning company, to provide professional services related to obtaining a prior credit facility. Tunstall Consulting is owned and operated by a member of the Board. Costs incurred by the Company for professional services provided by the related party were $104 and were recorded as deferred financing costs during 2016, which were subsequently fully amortized when the facility was repaid in full during the third quarter of 2016.

 

 

 

26


 

Item 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis of our financial condition and results of operations should be read together with our unaudited consolidated financial statements and related notes and other financial information included in Part 1, Item 1 of this Quarterly Report on Form 10-Q and with our audited consolidated financial statements and related notes thereto for the year ended December 31, 2016, included in our Annual Report on Form 10-K for the year ended December 31, 2016 filed with the Securities and Exchange Commission on March 14, 2017.

 

Forward-Looking Statements

 

This discussion contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are identified by words such as “believe,” “will,” “may,” “estimate,” “continue,” “anticipate,” “intend,” “should,” “plan,” “expect,” “predict,” “could,” “potentially” or the negative of these terms or similar expressions. You should read these statements carefully because they discuss future expectations, contain projections of future results of operations or financial condition, or state other “forward-looking” information. These statements relate to our future plans, objectives, expectations, intentions and financial performance and the assumptions that underlie these statements. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed elsewhere in this report, as well as in our Annual Report on Form 10-K for the year ended December 31, 2016. Forward-looking statements are based on our management’s beliefs and assumptions and on information currently available to our management. These statements, like all statements in this report, speak only as of their date, and we undertake no obligation to update or revise these statements in light of future developments. We caution investors that our business and financial performance are subject to substantial risks and uncertainties.

 

Overview

 

We are a healthcare technology company disrupting the field of medication safety. For over thirty years, traditional pharmacy software systems have offered clinicians a binary view of drug-to-drug interactions, presenting an assessment of one single drug against one single drug. These legacy systems may be adequate to assess the safety of a medication regimen consisting of only one or two medications. However, the elderly, the chronically ill and those with behavioral health challenges, who are more often times more likely to be subject to a medication profile of more than two medications, are typically at high risk of an adverse drug effect, or ADE. In these cases, the average patient often takes over 10 different medications a day and the current technologies are inadequate to optimize safety and minimize risk.  Our novel and proprietary Medication Risk Mitigation Matrix, or MRM Matrix, delivers a simultaneous, multi-drug review which identifies medication-related risks across a variety of safety factors and presents meaningful opportunities to mitigate such risks. We partner with health plans and provider groups in comprehensive medication management and care transitions programs to identify and substantially mitigate the risks associated with ADEs and to promote adherence to personalized medication regimens. By working with us, health plans and provider groups have reduced their pharmacy spend and admissions rates.

 

We are a leader in providing patient-specific, data-driven technology and solutions that enable healthcare organizations to optimize medication regimens to improve patient outcomes, reduce hospitalizations, lower healthcare costs and manage risk. We deliver our solutions through a comprehensive suite of technology-enabled products and services for medication risk management, which includes bundled prescription fulfillment and reminder packaging services for client populations with complex prescription needs. We also provide risk adjustment services and pharmacy cost management services, which help our clients to properly characterize a patient's acuity, or severity of health condition, and optimize the associated payments for care.

 

Our suite of cloud-based software solutions provides prescribers, pharmacists and healthcare organizations with sophisticated and innovative tools to better manage the medication-related needs of their patients. We believe we offer the first prospective clinical approach to medication risk management, which is designed to increase patient safety and promote adherence to a patient's personalized medication regimen. Furthermore, our medication risk management technology helps healthcare organizations lower costs by reducing ADEs, enhancing quality of care and avoiding preventable hospital admissions. Our products and services are built around our novel and proprietary MRM Matrix, which enables optimization of a patient's medication regimen, involving personalizing medication selection, dosage

27


 

levels, time-of-day administration and reducing the total medication burden by eliminating unnecessary prescriptions. The MRM Matrix analyzes a combination of clinical and pharmacology data, population-based algorithms and extensive patient-specific data, including medical history, lab results, medication lists and individual genomic data, to deliver "precision medicine." We provide software-enabled solutions that can be bundled with prescription fulfillment and reminder packaging services, which are informed by a patient's personalized MRM Matrix to increase adherence to a patient's optimized regimen, through our three prescription fulfillment pharmacies. Our prescription fulfillment pharmacies are strategically located to efficiently distribute medications nationwide for our clients and medications are packaged to promote adherence to their patients' personalized regimens and dosing schedules. Our team of clinical pharmacists, located in five call centers throughout the US, is available to support prescribers at the point of care through our proprietary technology platform, including real-time secure messaging, with more than 154,000 messages exchanged during September 2017, and support health plan members and prescribers with telephonic outreach and interventions based on drug therapy problems identified through the review of historical claims data.

 

Our technology-driven approach to medication risk management represents an evolution from prevailing non-personalized approaches that primarily rely on single drug-to-drug interaction analysis. At the end of 2016 we were serving 133 healthcare organizations and, as of September 30, 2017, this number has grown to 165 healthcare organizations that focus on populations with complex healthcare needs and extensive medication requirements.

 

Our total revenue for the three and nine months ended September 30, 2017 was $33.3 million and $90.6 million, respectively, compared to $24.2 million and $66.8 million for the three and nine months ended September 30, 2016, respectively. We earned net income of $7.7 million and $3.4 million for the three and nine months ended September 30, 2017, respectively, and incurred a net loss of $0.1 million and $0.2 million for the three and nine months ended September 30, 2016, respectively. Our adjusted EBITDA for the three and nine months ended September 30, 2017 was $4.6 million and $11.2 million, respectively, compared to $3.3 million and $8.8 million for the three and nine months ended September 30, 2016, respectively. See "Non-GAAP Financial Measures — Adjusted EBITDA" for our definition of Adjusted EBITDA, why we present Adjusted EBITDA and a reconciliation of net loss to Adjusted EBITDA.

 

We face a variety of challenges and risks, which we will need to address and manage as we pursue our growth strategy. In particular, we will need to continue to innovate in the face of a rapidly changing healthcare landscape if we are to remain competitive. We will also need to effectively manage our growth, especially related to our expansion beyond the PACE and post-acute markets to other at-risk providers and payors. Our senior management continuously focuses on these and other challenges, and we believe that our culture of innovation and our history of growth and expansion will contribute to the success of our business. We cannot, however, assure you that we will be successful in addressing and managing the many challenges and risks that we face.

 

We manage our operations and allocate resources as a single reportable segment. All of our revenue is recognized in the United States and all of our assets are located in the United States.

 

Unless the context requires otherwise, the terms the “Company,” “Tabula Rasa HealthCare, Inc.,” “we,” “us” and “our” mean Tabula Rasa HealthCare, Inc., a Delaware Corporation, and its consolidated subsidiaries.

 

28


 

Key Business Metrics

 

We regularly review a number of metrics, including the following key metrics, to evaluate and manage our business and that are useful in evaluating our operating performance compared to that of other companies in our industry.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

 

September 30, 

 

Change

 

 

    

2017

    

2016

    

$

    

%

 

 

 

 

(Dollars in thousands)

 

Revenues

 

$

33,268

 

$

24,174

 

$

9,094

 

38

%

Net income (loss)

 

 

7,695

 

 

(142)

 

 

7,837

 

nm

 

Adjusted EBITDA

 

 

4,647

 

 

3,252

 

 

1,395

 

43

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

 

 

 

 

 

September 30, 

 

Change

 

 

 

2017

 

2016

 

$

 

%

 

 

 

 

(Dollars in thousands)

 

Revenues

 

$

90,613

 

$

66,749

 

$

23,864

 

36

%

Net income (loss)

 

 

3,350

 

 

(219)

 

 

3,569

 

nm

 

Adjusted EBITDA

 

 

11,248

 

 

8,841

 

 

2,407

 

27

 

 

 

 

 

 

 

 

 

 

 

 

 

 

      nm = not meaningful

 

We monitor the key metrics set forth in the preceding table to help us evaluate trends, establish budgets, measure the effectiveness and efficiency of our operations and gauge our cash generation. We discuss Adjusted EBITDA in more detail in "Non-GAAP Financial Measures — Adjusted EBITDA." We also monitor revenue retention rate and client retention rate described as follows.

 

Revenue retention rate

 

We believe that our ability to retain revenue associated with new or existing client relationships is an indicator of the stability of our revenue base and the long-term value we provide to our clients. We assess our performance in this area using a metric we refer to as our revenue retention rate. We calculate our revenue retention rate at the end of each calendar year by dividing total revenue in the year from client contracts that have not renewed or have been terminated during the year by our total revenue for that year, and subtracting this quotient from 100%. Our annual revenue retention rate was 98% for 2016.

 

Client retention rate

 

We monitor our client retention rate as a measure for our overall business performance. We believe that our ability to retain clients is an indicator of the stability of our revenue base and the long-term value of our client relationships. We assess our performance in this area using a metric we refer to as our client retention rate. We calculate this rate by dividing the number of client terminations and client non-renewals during a calendar year by the total number of clients serviced during that year, and subtracting this quotient from 100%. Our annual client retention rate was 93% for 2016.

 

Factors Affecting our Future Performance

 

We believe that our future success will be dependent on many factors, including our ability to maintain and grow our relationships with existing clients, expand our client base, continue to enter new markets and expand our offerings to meet evolving market needs. While these areas present significant opportunity, they also present risks that we must manage to ensure successful results. See the section entitled "Risk Factors" for a discussion of certain risks and uncertainties that may impact our future success.

 

29


 

Recent Developments

 

Initial Public Offering

 

On October 4, 2016, we completed our initial public offering, or IPO, of our common stock pursuant to which we issued 4,300,000 shares of our common stock, plus the exercise of the underwriters’ option to purchase an additional 645,000 shares of common stock, at an issuance price of $12.00 per share. We received net proceeds of $55.2 million after deducting underwriting discounts and commissions of $4.2 million, but before deducting other offering expenses. Immediately prior to the completion of the IPO, all of the Company’s then outstanding Class A Non-Voting common stock and Class B Voting common stock, totaling 5,583,405 shares, were redesignated into shares of common stock, par value $0.0001 per share, and all of the Company’s then outstanding convertible preferred stock converted into an aggregate of 5,089,436 shares of common stock, par value $0.0001 per share. Our common stock is listed on the NASDAQ Global Market under the symbol “TRHC.”

 

Acquisitions

 

On September 6, 2017, we entered into an Agreement and Plan of Merger with Sinfonía HealthCare Corporation, pursuant to which we acquired the SinfoníaRx business, which we refer to as SRx. SRx is a provider of Medication Therapy Management, or MTM, technology and services for Medicare, Medicaid, and commercial health plans. The consideration for the acquisition was comprised of (i) cash consideration of $35.0 million paid upon closing, subject to certain customary post-closing adjustments; (ii) the issuance of $10.0 million worth of our common stock, or 520,821 shares, calculated based on the arithmetic average of the day volume-weighted average (rounded to two decimal places) trading price per share of our common stock for the 20 trading days ended on and including the trading day prior to the closing of the acquisition, using trading prices reported on the NASDAQ Global Market; and (iii) contingent purchase price consideration with a preliminary estimated acquisition date fair value of $26.4 million to be paid 50% in cash and 50% in our common stock based on the achievement of certain performance goals for each of the twelve-month periods ended December 31, 2017 and December 31, 2018. The stock consideration issued upon closing had a value of $11.5 million. In addition, we are not obligated to pay more than $35.0 million in cash and our common stock for the first contingent payment, or more than $130.0 million for the aggregate overall closing consideration and contingent payments.

 

In September 2016, we acquired certain assets, consisting primarily of intellectual property and software assets of 9176-1916 Quebec Inc. (an entity indirectly controlled by our Chief Scientific Officer, Jacques Turgeon). The intellectual property and software assets were previously licensed by us and are integrated into the MRM Matrix. The acquisition consideration consisted of cash consideration of $6.0 million, consisting of $1.0 million which was paid upon closing, $4.4 million paid during the fourth quarter of 2016, $550 thousand paid on September 15, 2017, and $50 thousand paid during the fourth quarter of 2017. In addition to the cash consideration, the purchase price included $5.0 million worth of common stock which amounted to the issuance of 395,407 shares of common stock during the fourth quarter of 2016. The stock consideration issued in 2016 was calculated based on the arithmetic average of the daily volume-weighted average price of the Company’s common stock for the 30 business days ending on, and including, the 30th and 60th business day, respectively, following the completion of the IPO.

 

We account for acquisitions using the purchase method of accounting. We allocated the purchase price to the assets and liabilities acquired, including intangible assets and liabilities assumed, based on estimated fair values at the date of the acquisition. The results of operations from the acquisition are included in our consolidated financial statements from the acquisition date.

 

Financing

 

On September 6, 2017, we entered into an Amended and Restated Loan and Security Agreement, or the Amended and Restated 2015 Line of Credit, whereby we amended and restated our revolving line of credit, which was originally entered into on April 29, 2015 and amended on July 1, 2016.  The Amended and Restated 2015 Line of Credit provides for borrowings in an aggregate amount up to $40.0 million to be used for general corporate purposes, with a $1.0 million sublimit for cash management services and letters of credit and foreign exchange transactions. We may also request an increase in the size of the Amended and Restated 2015 Line of Credit by up to $10.0 million upon the successful syndication of such additional amounts. As of September 30, 2017, there was $35.0 million outstanding under the Amended and Restated 2015 Line of Credit. See "Liquidity and Capital Resources — Revolving Credit Facility"

30


 

below for additional information with respect to the Amended and Restated 2015 Line of Credit.

 

Enhanced Medication Therapy Management Program

 

On January 1, 2017, we launched our Enhanced Medication Therapy Management, or EMTM, program, with a large, regional Medicare Part D Prescription Drug Plan, or Regional PDP. The Part D Enhanced Medication Therapy Management Model created by the Centers for Medicare & Medicaid Services, or CMS, is designed to test strategies to improve medication use among Medicare beneficiaries enrolled in Part D and to assess whether providing selected Regional PDPs with additional incentives and increased flexibility to design and implement innovative programs will better achieve the overall goals for EMTM programs.

 

To execute this EMTM program, we are using our MRM Matrix and certain other services to perform medication risk stratification and reviews and safety assessments of complex medication regimens, providing an innovative, alternative approach to pharmacotherapy to the 240,000 members of this Regional PDP, representing less than one percent of the entire eligible Part D market. We believe if we are successful in developing and delivering an EMTM program to the Regional PDP, we will be able to expand into a greater portion of the Part D market. There can be no assurances that our EMTM program will be successful or we will actually be able to expand this program as currently contemplated.

 

Components of Our Results of Operations

 

Revenue

 

Our revenue is derived from our product sales and service activities. For the three months ended September 30, 2017 and 2016, product sales represented 74% and 86% of our total revenue, respectively, and service revenue represented 26% and 14% of our total revenue, respectively. For the nine months ended September 30, 2017 and 2016, product sales represented 79% and 88% of our total revenue, respectively, and service revenue represented 21% and 12% of our total revenue, respectively.

 

Product Revenue

 

Our product revenue is primarily generated through our medication risk management contracts with healthcare organizations. Under these contracts, we provide a group of services including the use of our MRM Matrix technology that enables our pharmacists to prospectively optimize personalized medication regimens for each patient, prescription fulfillment, and reminder packing services. Historically, substantially all of our medication risk management clients have contracted for a bundled offering of our software-enabled solutions, prescription fulfillment and reminder packaging services. In the third quarter of 2016, we began providing medication risk management services utilizing our MRM Matrix technology alone, without the related fulfillment services, which we refer to as MRM Service Contracts. Revenue generated from MRM Service Contracts without prescription fulfillment and reminder packaging services is included as a component of our service revenue.

 

Under our bundled medication risk management contracts, revenue is generated through the following components:

 

Prescription medication revenue.    We sell prescription medications directly to healthcare organizations through our prescription fulfillment pharmacies. Prescription medication fees are based upon the prices stated in client contracts for the prescription and include a dispensing fee. For the periods presented, substantially all of our product revenue has consisted of prescription medication revenue.

 

Per member per month, or PMPM, fees.    We also receive a fixed monthly administrative fee for each member in the program contracted for medication risk management services.

 

Our revenue from prescription medication sales varies based on the number and mix of medications dispensed; however, based on our historical experience, patient populations at our clients do not generally decline over time, the number of medications per patient have been consistent following an initial onboarding period and the overall mix of medications dispensed is generally predictable. In addition, our dispensing fees vary directly with the volume of prescription medication sales each period. Our PMPM fees vary directly with the number of members serviced by our

31


 

clients each month. Although revenue is generated from various sources, pricing and other key contractual terms are negotiated on a bundled basis.

 

Service Revenue

 

On January 1, 2017, we launched our EMTM program to perform medication risk stratification and reviews and safety assessments of complex medication regimens and, as a result, we began generating PMPM fees under our MRM Service Contracts. PMPM fees earned with respect to our MRM Service Contracts are included in service revenue. As noted above, PMPM fees associated with our bundled medication risk management services are currently included in product revenue. Service revenue also consists of medication therapy management services, which we refer to as MTM Contracts, provided by SRx, which was acquired on September 6, 2017. Revenue from MTM Contracts is primarily generated from PMPM fees or transactional based fixed fees per medication therapy review.

 

Our service revenue is also generated by the risk adjustment and pharmacy cost management services that we provide to healthcare organizations. Our client contracts for these services generally include a PMPM fee for selected services, monthly subscription fees, initial set up fees and hourly consulting charges. PMPM fees vary directly with the number of members serviced by our clients each month under our risk adjustment contracts. Additionally, service revenue includes data and statistics fees we receive from medication manufacturers for the sale of medication utilization data we collect through our pharmacy cost management engagements, which is recognized when we receive such amounts due to the variable nature of payment amounts.

 

Cost of Revenue

 

Product Cost

 

Cost of product revenue includes all costs directly related to the bundled medication risk management offering, including costs relating to our pharmacists' collaboration on a patient's medication management, medication risk analysis and offering guidance to the prescriber based upon the assessment of the MRM Matrix and the individual patient's medical history, as well as the fulfillment and distribution of prescription medications. Costs consist primarily of the purchase price of the prescription medications we dispense. For the three months ended September 30, 2017 and 2016, prescription medication costs represented 76% and 77% of our total product costs, respectively. For the nine months ended September 30, 2017 and 2016, prescription medication costs represented 76% of our total product costs. In addition to costs incurred for the prescription medications we dispense, other costs include expenses to package, dispense and distribute prescription medications, expenses associated with our clinical pharmacist support centers and prescription fulfillment centers, including employment costs and stock-based compensation, and expenses related to the hosting of our technology platform. Such costs also include direct overhead expenses, as well as allocated miscellaneous overhead costs. We allocate miscellaneous overhead costs among functions based on employee headcount.

 

Service Cost

 

Cost of service revenue includes all costs directly related to servicing our MRM Service Contracts and MTM Contracts which primarily consist of labor costs, consultant fees, and expenses related to supporting our technology platform. In addition, cost of service revenues includes all labor costs, including stock-based compensation expense, directly related to the risk adjustment and pharmacy cost management services and expenses for claims processing, technology services and overhead costs. Cost of service revenue also includes direct overhead expenses, as well as allocated miscellaneous overhead costs. We allocate miscellaneous overhead costs among functions based on employee headcount.

 

Research and Development Expenses

 

Our research and development expenses consist primarily of salaries and related costs, including stock-based compensation expense, for personnel in our research and development functions, which include software developers, project managers and other employees engaged in scientific education and research, and the development and enhancement of our service offerings. Research and development expenses also include costs for design and development of new software and technology and new service offerings, as well as enhancement of existing software and technology and service offerings, including fees paid to third-party consultants, costs related to quality assurance and testing, and other allocated facility-related overhead and expenses.

32


 

 

We continue to focus our research and development efforts on adding new features and applications, increasing the functionality and enhancing the ease of use of our existing suite of software solutions.

 

We capitalize certain costs incurred in connection with obtaining or developing internal-use software, including external direct costs of material and services and payroll costs for employees directly involved with the software development. Capitalized software costs are amortized beginning when the software project is substantially complete and the asset is ready for its intended use. Costs incurred during the preliminary project stage and post-implementation stage, as well as maintenance and training costs, are expensed as incurred as part of research and development expenses.

 

We expect our research and development expenses will increase in absolute dollars as we increase our research and development headcount to further strengthen and enhance our software solutions and service offerings, but will decrease as a percentage of revenue in the long term as we expect our revenue to increase at a greater rate than such expenses.

 

Sales and Marketing Expenses

 

Sales and marketing expenses consist principally of salaries, commissions, bonuses, stock-based compensation and employee benefits for sales and marketing personnel, as well as travel costs related to sales, marketing and client service activities. Marketing costs also include costs of communication and branding materials, trade shows and public relations, as well as allocated overhead.

 

We expect our sales and marketing expenses to increase in absolute dollars as we strategically invest to grow our marketing operations and expand into new products and markets, but decrease as a percentage of revenue in the long term. We expect to hire additional sales personnel and related account management and sales support personnel as we continue to grow.

 

General and Administrative Expenses

 

General and administrative expenses consist principally of salaries and related costs for executives, administrative personnel and consultants, including stock-based compensation and travel expenses. Other general and administrative expenses include professional fees for legal, consulting and accounting services. General and administrative expenses are expensed when incurred.

 

We expect that our general and administrative expenses will increase as we expand our infrastructure and transition to a public company. These increases include increased costs for director and officer liability insurance, costs related to the hiring of additional personnel and increased fees for directors, outside consultants, lawyers and investor relations. We also expect to incur significant costs to comply with corporate governance, internal controls and similar requirements applicable to public companies.

 

Remeasurement of Acquisition-related Contingent Consideration

 

We classify our acquisition-related contingent consideration as a liability. Acquisition-related contingent consideration is subject to remeasurement at each balance sheet date. Any change in the fair value of such acquisition-related contingent consideration is reflected in our consolidated statements of operations as a change in fair value of the liability. We will continue to adjust the carrying value of the acquisition-related contingent consideration until the contingency is finally determined.

 

Depreciation and Amortization Expenses

 

Depreciation and amortization expenses are primarily attributable to our capital investment in equipment and our capitalized software and acquisition-related intangibles.

 

33


 

Change in Fair Value of Warrant Liability

 

Historically, warrants to purchase shares of our preferred stock were classified as warrant liabilities and recorded at fair value. This warrant liability was subject to remeasurement at each balance sheet date and we recognized any change in fair value in our consolidated statements of operations as a change in fair value of the warrant liability. Upon the completion of the IPO in October 2016, these warrants automatically converted into warrants to purchase shares of our common stock. At that time, the liabilities were reclassified to additional paid-in capital, a component of stockholders' equity.

 

Interest Expense

 

Interest expense is primarily attributable to interest expense associated with our revolving credit facility, capital lease obligations and acquisition-related consideration payable. It also includes the amortization of discounts on debt and amortization of deferred financing costs related to these various debt arrangements.

 

Accretion (Decretion) of Redeemable Convertible Preferred Stock

 

Historically, the carrying values of Series A and Series A-1 redeemable convertible preferred stock were being accreted to their respective redemption values at each reporting period, from the date of issuance to the earliest date the holders can demand redemption. The carrying value of Series B redeemable convertible preferred stock was being accreted (decreted) to redemption value at each reporting period at the greater of (i) the original issuance price plus unpaid accrued dividends or (ii) the fair value of the redeemable convertible preferred stock. Upon the completion of the IPO in October 2016, our preferred stock automatically converted into shares of our common stock.

 

Results of Operations

 

The following table summarizes our results of operations for the three and nine months ended September 30, 2017 and 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

 

 

 

 

 

 

September 30, 

 

Change

 

 

September 30, 

 

Change

 

 

 

    

2017

    

2016

    

$

    

%

 

    

2017

    

2016

    

$

    

%

 

    

 

 

(Dollars in thousands)

 

 

(Dollars in thousands)

 

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product revenue

 

$

24,621

 

$

20,731

 

$

3,890

 

19

%

 

$

71,391

 

$

58,732

 

$

12,659

 

22

%

 

Service revenue

 

 

8,647

 

 

3,443

 

 

5,204

 

151

 

 

 

19,222

 

 

8,017

 

 

11,205

 

140

 

 

Total revenue

 

 

33,268

 

 

24,174

 

 

9,094

 

38

 

 

 

90,613

 

 

66,749

 

 

23,864

 

36

 

 

Cost of revenue, exclusive of depreciation and amortization shown below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product cost

 

 

18,979

 

 

15,951

 

 

3,028

 

19

 

 

 

54,847

 

 

44,103

 

 

10,744

 

24

 

 

Service cost

 

 

4,486

 

 

1,232

 

 

3,254

 

264

 

 

 

9,241

 

 

3,135

 

 

6,106

 

195

 

 

Total cost of revenue

 

 

23,465

 

 

17,183

 

 

6,282

 

37

 

 

 

64,088

 

 

47,238

 

 

16,850

 

36

 

 

Gross profit

 

 

9,803

 

 

6,991

 

 

2,812

 

40

 

 

 

26,525

 

 

19,511

 

 

7,014

 

36

 

 

Operating expenses: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

1,527

 

 

1,028

 

 

499

 

49

 

 

 

4,037

 

 

2,878

 

 

1,159

 

40

 

 

Sales and marketing

 

 

1,325

 

 

881

 

 

444

 

50

 

 

 

3,869

 

 

2,511

 

 

1,358

 

54

 

 

General and administrative

 

 

4,098

 

 

2,053

 

 

2,045

 

100

 

 

 

16,097

 

 

5,762

 

 

10,335

 

179

 

 

Change in fair value of acquisition-related contingent consideration expense

 

 

923

 

 

47

 

 

876

 

nm

 

 

 

960

 

 

146

 

 

814

 

nm

 

 

Depreciation and amortization

 

 

2,166

 

 

1,276

 

 

890

 

70

 

 

 

5,730

 

 

3,415

 

 

2,315

 

68

 

 

Total operating expenses 

 

 

10,039

 

 

5,285

 

 

4,754

 

90

 

 

 

30,693

 

 

14,712

 

 

15,981

 

109

 

 

Income (loss) from operations

 

 

(236)

 

 

1,706

 

 

(1,942)

 

(114)

 

 

 

(4,168)

 

 

4,799

 

 

(8,967)

 

nm

 

 

Other (income) expense: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in fair value of warrant liability

 

 

 —

 

 

(626)

 

 

626

 

(100)

 

 

 

 —

 

 

(639)

 

 

639

 

(100)

 

 

Interest expense

 

 

174

 

 

1,242

 

 

(1,068)

 

(86)

 

 

 

327

 

 

4,250

 

 

(3,923)

 

(92)

 

 

Loss on extinguishment of debt

 

 

 —

 

 

1,396

 

 

(1,396)

 

(100)

 

 

 

 —

 

 

1,396

 

 

(1,396)

 

(100)

 

 

Total other expense

 

 

174

 

 

2,012

 

 

(1,838)

 

(91)

 

 

 

327

 

 

5,007

 

 

(4,680)

 

(93)

 

 

Income (loss) before income taxes

 

 

(410)

 

 

(306)

 

 

(104)

 

nm

 

 

 

(4,495)

 

 

(208)

 

 

(4,287)

 

nm

 

 

Income tax (benefit) expense

 

 

(8,105)

 

 

(164)

 

 

(7,941)

 

nm

 

 

 

(7,845)

 

 

11

 

 

(7,856)

 

nm

 

 

Net income (loss)

 

$

7,695

 

$

(142)

 

$

7,837

 

nm

 

 

$

3,350

 

$

(219)

 

$

3,569

 

nm

 

 

 

nm = not meaningful

 

34


 

Comparison of the Three Months Ended September 30, 2017 and 2016

 

Product Revenue

 

Product revenue increased $3.9 million, or 19%, from $20.7 million for the three months ended September 30, 2016 to $24.6 million for the comparable period in 2017. The increase was primarily driven by organic growth in medication risk management, which represented approximately $4.3 million of the increase. Of that $4.3 million increase, approximately $1.7 million was attributable to new customers acquired period over period, while the remaining $2.6 million was attributable to increased prescription fulfillment volume from existing customers. These increases were partially offset by a $360 thousand decrease in product revenue primarily due to change in medication mix of prescriptions filled and payor mix.

 

Service Revenue

 

Service revenue increased $5.2 million, or 151%, from $3.4 million for the three months ended September 30, 2016 to $8.6 million for the three months ended September 30, 2017. Service fees generated under MTM Contracts from the SRx acquisition contributed approximately $2.6 million to the increase in service revenue since the acquisition date of September 6, 2017. The increase in service revenue was also due to the launch of our EMTM program on January 1, 2017, which resulted in a $2.0 million increase in revenue primarily related to PMPM fees that we began generating under our MRM Service Contracts with our EMTM partner. In addition, there was a $577 thousand increase in revenue related to our risk adjustment services, of which, $221 thousand was related to revenue generated from new risk adjustment clients and $356 thousand was attributable to organic growth with existing clients.

 

For the three months ended September 30, 2017, $6.8 million of service revenue related to PMPM fees generated under our MRM Service Contracts and risk adjustment contracts, PMPM and transactional based fees generated under our MTM Contracts from the SRx acquisition, and subscription revenue related to our pharmacy cost management contracts.  The remaining $1.8 million primarily represented hourly consulting charges, setup fees and data and statistics revenue from our pharmacy cost management and risk adjustment services. For the three months ended September 30, 2016, $1.2 million related to PMPM fees and subscription revenue, and $1.5 million represented hourly consulting charges, setup fees and data and statistics revenue generated from our pharmacy cost management and risk adjustment services. The remaining $685 thousand was the portion of our fixed fee arrangement in 2016 we recognized under our MRM Service Contract with our EMTM partner.

 

Cost of Product Revenue

 

Cost of product revenue increased $3.0 million, or 19%, from $16.0 million for the three months ended September 30, 2016 to $19.0 million for the comparable period in 2017. This increase was largely driven by increased volume, which contributed approximately $2.5 million to the change. Manufacturer price decreases and medication mix of prescriptions filled for our clients' patients resulted in a decrease of $337 thousand. In addition, labor costs increased $546 thousand, which was primarily due to added pharmacy headcount, including additional pharmacists, technicians and support staff, to support our growth. Distribution charges also increased $222 thousand related to higher shipping volume for the medications we fulfilled for our clients' patients.

 

Cost of Service Revenue

 

Cost of service revenue increased $3.3 million, or 264%, from $1.2 million for the three months ended September 30, 2016 to $4.5 million for the three months ended September 30, 2017. The increase in service costs was due to the acquisition of SRx, which contributed approximately $1.6 million to such increase and primarily included contract labor costs and employee compensation costs to support the MTM Contracts. The remaining increase in service costs was primarily attributable to $1.3 million of additional labor costs as a result of increased headcount as well as standard increases in salary and benefits to existing employees. The increase in labor costs was primarily due to $870 thousand related to added headcount to support our MRM Service Contracts, a $230 thousand increase in risk adjustment personnel costs, and a $40 thousand increase in pharmacy cost management personnel costs. Other costs of service revenue also increased by $392 thousand primarily due to added professional services, information technology costs, and rent and utilities expense to support our MRM Service Contracts.

 

35


 

Research and Development Expenses

 

Research and development expenses increased $499 thousand, or 49%, from $1.0 million for the three months ended September 30, 2016 to $1.5 million for the comparable period in 2017. The increase was primarily due to a $309 thousand increase in payroll and payroll-related costs for additional headcount as well as increases in salary and benefits for existing employees related to market adjustments and performance based increases. In addition, rent and utilities expenses increased as a result of our new office space in South Carolina dedicated to software development, and increased professional services to support scientific education research and development activities. The acquisition of SRx contributed $113 thousand to the increase, which primarily included employee salaries.

 

Sales and Marketing Expenses

 

Sales and marketing expenses increased $444 thousand, or 50%, from $881 thousand for the three months ended September 30, 2016 to $1.3 million for the comparable period in 2017. The increase in sales and marketing expense was primarily due to a $465 thousand increase in personnel costs related to added headcount to support our operational growth, and increases in salaries and benefits related to market adjustments and performance-based increases for our existing employees. This increase was partially offset by a decrease of $75 thousand in conference and other marketing related expenses. The acquisition of SRx contributed $54 thousand to the increase which primarily included employee salaries.

 

General and Administrative Expenses

 

General and administrative expenses increased $2.0 million, or 100%, from $2.1 million for the three months ended September 30, 2016 to $4.1 million for the comparable period in 2017. In connection with the SRx acquisition, we incurred direct acquisition costs of $855 thousand, which primarily included legal expenses, due diligence fees, and other professional services. The increase in general and administrative expenses was also due to a $649 thousand increase in personnel costs related to added headcount and increases in salaries and benefits related to market adjustments and performance-based increases for our existing employees.  In addition, we incurred approximately $281 thousand of incremental general and administrative expenses related to supporting our operations as a public company. These incremental expenses primarily related to legal expenses, increased directors’ and officers’ liability insurance, professional services for investor relations, and fees for directors. The SRx acquisition also contributed an additional $277 thousand of general and administrative expenses, which primarily included employee salaries and information technology costs.

 

Acquisition-related Contingent Consideration Expense

 

During the three months ended September 30, 2017 and 2016, there was a $923 thousand and a $47 thousand charge incurred, respectively. Of the total charge in the three months ended September 30, 2017, $907 thousand related to the remeasurement as of September 30, 2017 of the fair value of the contingent consideration associated with our acquisition of SRx and $16 thousand related to the accretion of the contingent consideration associated with our acquisition of Medliance. The charge in the three months ended September 30, 2016 related to the accretion of the contingent consideration associated with our Medliance acquisition.

 

Depreciation and Amortization Expenses

 

Depreciation and amortization expenses increased $890 thousand, or 70%, from $1.3 million for the three months ended September 30, 2016 to $2.2 million for the comparable period in 2017. This increase was primarily due to a $708 thousand increase in amortization expense, which included a $584 thousand increase in amortization expense of intangible assets primarily related to intangible assets acquired from SRx in September 2017 and intangible assets acquired from 9176-1916 Quebec Inc. in September 2016. The increase in amortization expense was also due to a $124 thousand increase in amortization of capitalized software related to new software functionality placed into service after September 30, 2016. An additional $182 thousand increase in depreciation and amortization expense was attributable to purchases of property and equipment and leasehold improvements primarily related to our new office location for our headquarters, our new office space in South Carolina dedicated to software development, which we began to occupy in July 2017, and our new space in South San Francisco dedicated to pharmacy dispensing, which we began to occupy in February 2017.

 

36


 

Change in Fair Value of Warrant Liability

 

During the three months ended September 30, 2016, we recognized a $626 thousand gain for the change in fair value of warrant liability due to a slight decrease in the estimated fair value of our Series A-1 and Series B redeemable convertible preferred stock. Upon the completion of the IPO in October 2016, these warrants automatically converted into warrants to purchase shares of our common stock and the warrant liabilities were reclassified to additional paid-in capital, a component of stockholders' equity.

 

Interest Expense

 

Interest expense decreased $1.1 million, or 86%, from $1.2 million for the three months ended September 30, 2016 to $174 thousand for the three months ended September 30, 2017. The decrease in interest expense was primarily due to the repayment of our term loan credit facility with ABC Funding, LLC, or the ABC Credit Facility, during the fourth quarter of 2016. The ABC Credit Facility was entered into during the third quarter of 2016 and the proceeds thereof were used to repay all outstanding principal and interest under the Medliance Notes, as well as loans entered into with Eastward Capital Partners V, L.P. and its affiliates in April 2014 and December 2014, or the Eastward Loans. The ABC Credit Facility was subsequently repaid during the fourth quarter of 2016 with the proceeds received from the IPO.

 

Loss on extinguishment of debt

 

During 2016, we recognized a $1.4 million loss on extinguishment of debt as a result of a prepayment premium and the recognition of the remaining unamortized discounts and finance costs on the Eastward Loans in connection with the repayment of all outstanding principal and interest with the proceeds of the ABC Credit Facility, entered into on July 1, 2016. The ABC Credit Facility was subsequently repaid during the fourth quarter of 2016 with the proceeds received from the IPO.

 

Income Taxes

 

For the three months ended September 30, 2017, we recorded an income tax benefit of $8.1 million. During the third quarter of 2017, in conjunction with the acquisition of SRx, we recognized a net deferred tax liability of $8.9 million primarily related to intangible assets other than goodwill.  We determined that the deferred tax liabilities related to the acquisition provide sufficient sources of recoverability to realize the deferred tax assets associated with those jurisdictions that file consolidated returns. As a result, we released $6.6 million of the deferred tax asset valuation allowance and recognized an additional benefit of $2.8 million related to tax windfall benefits generated in the nine months ended September 30, 2017. These tax benefits were partially offset by tax expense in the amount of $1.2 million recorded based on the estimated annual effective tax rate.

 

For the three months ended September 30, 2016, we recorded a tax benefit of $164 thousand which resulted in an effective tax rate of 53.6%. The benefit in 2016 was primarily related to a reduction in the overall effective rate for the full fiscal year due to an increase in expected pre-tax loss for the year as a result of the losses on debt extinguishments. We recorded the tax provision based on the estimated annual effective tax rate expected for the full year which included Federal alternative minimum tax, current state taxes and deferred tax expense associated with indefinite-lived deferred tax liabilities for goodwill amortization, in addition to a change in the valuation allowance related to deferred tax assets for income generated in the current period.

 

Comparison of the Nine Months Ended September 30, 2017 and 2016

 

Product Revenue

 

Product revenue increased $12.7 million, or 22%, from $58.7 million for the nine months ended September 30, 2016 to $71.4 million for the comparable period in 2017. The increase was primarily driven by organic growth in medication risk management, which represented approximately $12.0 million of the increase. Of that $12.0 million increase, approximately $3.9 million was attributable to new customers acquired period over period, while the remaining $8.1 million was attributable to increased prescription fulfillment volume from existing customers. Medication mix of prescriptions filled and payor mix contributed to an additional $623 thousand of the overall increase in product revenue.

 

37


 

Service Revenue

 

Service revenue increased $11.2 million, or 140%, from $8.0 million for the nine months ended September 30, 2016 to $19.2 million for the nine months ended September 30, 2017. The increase was primarily the result of the launch of our EMTM program on January 1, 2017, which resulted in a $6.7 million increase in service revenue primarily related to PMPM fees that we began generating under our MRM Service Contracts with our EMTM partner. Service fees generated under MTM Contracts from the SRx acquisition contributed approximately $2.6 million to the increase in service revenue since the acquisition date of September 6, 2017. In addition, there was a $1.2 million increase in revenue related to our risk adjustment services, of which, $390 thousand was related to revenue generated from new risk adjustment clients and $848 thousand was attributable to organic growth with existing clients. Increases in our pharmacy cost management services of $449 thousand were primarily due to an increase in manufacturer fees related to the sale of medication utilization data.

 

For the nine months ended September 30, 2017, $14.5 million of service revenue related to PMPM fees generated under our MRM Service Contracts and risk adjustment contracts, PMPM and transactional based fees generated under our MTM Contracts from the SRx acquisition, and subscription revenue related to our pharmacy cost management contracts.  The remaining $4.7 million of service revenue represented hourly consulting charges, setup fees and data and statistics revenue from our pharmacy cost management and risk adjustment services, and other services. For the nine months ended September 30, 2016, service revenue generated from our PMPM fees and subscription revenue was $3.5 million and $3.8 million represented hourly consulting charges, setup fees and data and statistics revenue generated from our pharmacy cost management and risk adjustment services. The remaining $685 thousand was the portion of our fixed fee arrangement in 2016 we recognized under our MRM Service Contract with our EMTM partner.

 

Cost of Product Revenue

 

Cost of product revenue increased $10.7 million, or 24%, from $44.1 million for the nine months ended September 30, 2016 to $54.8 million for the comparable period in 2017. This increase was largely driven by increased volume of revenue, which contributed approximately $6.9 million to the change. In addition, labor costs increased $1.8 million, which was primarily due to added pharmacy headcount, including additional pharmacists, technicians and support staff, to support our growth. Manufacturer price increases and medication mix of prescriptions filled for our clients' patients contributed an additional $884 thousand to the overall increase in the cost of product revenue. Distribution charges also increased $728 thousand related to higher shipping volume for the medications we fulfilled for our clients' patients. The remaining increase was primarily due to increased information technology, rent and utilities, and other allocated overhead expenses a result of the new location for our headquarters and pharmacy and continued operational growth.

 

Cost of Service Revenue

 

Cost of service revenue increased $6.1 million, or 195%, from $3.1 million for the nine months ended September 30, 2016 to $9.2 million for the nine months ended September 30, 2017. The increase was primarily attributable to $3.2 million of additional labor costs as a result of increased headcount as well as standard increases in salary and benefits to existing employees. Of the $3.2 million increase in labor costs, $2.3 million related to added headcount to support our MRM Service Contracts, $473 thousand related to added headcount to support risk adjustment contracts and $159 thousand related to increases in pharmacy cost management personnel costs. Other costs of service revenue increased $1.3 million primarily due to added professional services, information technology costs, and rent and utilities expense to support our MRM Service Contracts. The acquisition of SRx also contributed $1.6 million to the increase cost of service revenue and primarily included contract labor costs and employee compensation costs to support the MTM Contracts.

 

Research and Development Expenses

 

Research and development expenses increased $1.2 million, or 40%, from $2.9 million for the nine months ended September 30, 2016 to $4.0 million for the comparable period in 2017. The increase was primarily due to a $952 thousand increase in payroll and payroll-related costs for additional headcount as well as increases in salary and benefits for existing employees related to market adjustments and performance based increases. In addition, rent and utilities expenses increased as a result of our new office space in South Carolina dedicated to software development. The acquisition of SRx contributed $113 thousand to the increase, which primarily included employee salaries.

38


 

 

Sales and Marketing Expenses

 

Sales and marketing expenses increased $1.4 million, or 54%, from $2.5 million for the nine months ended September 30, 2016 to $3.9 million for the comparable period in 2017. The increase in sales and marketing expense was primarily due to a $1.4 million increase in personnel costs related to added headcount to support our operational growth, and increases in salaries and benefits related to market adjustments and performance-based increases for our existing employees. This increase was partially offset by a decrease in conference and other marketing related expenses. The acquisition of SRx contributed $54 thousand to the increase, which primarily included employee salaries.

 

General and Administrative Expenses

 

General and administrative expenses increased $10.3 million, or 179%, from $5.8 million for the nine months ended September 30, 2016 to $16.1 million for the comparable period in 2017. The increase was primarily attributable to a $6.1 million increase in stock-based compensation costs primarily related to shares of restricted stock that were granted to certain employees in September 2016, and an increase in stock option expense as a result of stock options granted to employees during the fourth quarter of 2016 and through the third quarter of 2017. Personnel costs, including salaries and benefits, also increased by $1.5 million primarily due to an increase in headcount to support the overall growth of our operations. In addition, we incurred approximately $1.0 million of incremental general and administrative expenses related to supporting our operations as a public company. These incremental expenses primarily related to legal expenses, increased directors’ and officers’ liability insurance, professional services for investor relations, and fees for directors. In connection with the SRx acquisition, the Company incurred direct acquisition costs of $949 thousand which primarily included legal expenses, due diligence fees, and other professional services. The SRx acquisition also contributed an additional $277 thousand of general and administrative expenses, which primarily included employee salaries and information technology costs.

 

Acquisition-related Contingent Consideration Expense

 

During the nine months ended September 30, 2017 and 2016, there was a $960 thousand and a $146 thousand charge incurred, respectively. Of the total charge in the nine months ended September 30, 2017, $907 thousand related to the remeasurement as of September 30, 2017 as of the fair value of the contingent consideration associated with our acquisition of SRx and $53 thousand related to the accretion of the contingent consideration associated with our acquisition of Medliance. The charge in the nine months ended September 30, 2016 related to the accretion of the contingent consideration associated with our Medliance acquisition.

 

Depreciation and Amortization Expenses

 

Depreciation and amortization expenses increased $2.3 million, or 68%, from $3.4 million for the nine months ended September 30, 2016 to $5.7 million for the comparable period in 2017. This increase was due to a $1.8 million increase in amortization expense, which included a $1.3 million increase in amortization expense of intangible assets, primarily related to intangible assets acquired from SRx in September 2017 and intangible assets acquired from 9176-1916 Quebec Inc. in September 2016. The increase in amortization expense was also due to a $480 thousand increase in amortization of capitalized software related to new software functionality placed into service after September 30, 2016. An additional $507 thousand increase in depreciation and amortization expense was attributable to purchases of property and equipment and leasehold improvements primarily related to our new office locations for our headquarters, our new office space in South Carolina dedicated to software development, and our new space in South San Francisco dedicated to pharmacy dispensing.

 

Change in Fair Value of Warrant Liability

 

During the nine months ended September 30, 2016, we recognized a $639 thousand gain for the change in fair value of warrant liability due to a slight decrease in the estimated fair value of our Series A-1 and Series B redeemable convertible preferred stock. Upon the completion of the IPO in October 2016, these warrants automatically converted into warrants to purchase shares of our common stock and the warrant liabilities were reclassified to additional paid-in capital, a component of stockholders' equity.

 

39


 

Interest Expense

 

Interest expense decreased $4.0 million, or 92%, from $4.3 million for the nine months ended September 30, 2016 to $327 thousand for the nine months ended September 30, 2017. The decrease in interest expense was primarily due to the repayment of the Medliance Notes and the Eastward Loans with the proceeds from the ABC Credit Facility in July 2016. The decrease in interest expense was also due to the repayment of the ABC Credit Facility during the fourth quarter of 2016 with the proceeds received from the IPO. In addition, there was one month of borrowings outstanding on the 2015 Line of Credit during 2017 compared to nine months of borrowings outstanding on the 2015 Line of Credit during 2016.

 

Loss on extinguishment of debt

 

During 2016, we recognized a $1.4 million loss on extinguishment of debt as a result of a prepayment premium and the recognition of the remaining unamortized discounts and finance costs on the Eastward Loans in connection with the repayment of all outstanding principal and interest with the proceeds of the ABC Credit Facility, entered into on July 1, 2016. The ABC Credit Facility was subsequently repaid during the fourth quarter of 2016 with the proceeds received from the IPO.

 

Income Taxes

 

For the nine months ended September 30, 2017, we recorded an income tax benefit of $7.8 million. During the third quarter of 2017, in conjunction with the acquisition of SRx, we recognized a net deferred tax liability of $8.9 million primarily related to intangible assets other than goodwill. We determined that the deferred tax liabilities related to the acquisition provide sufficient sources of recoverability to realize the deferred tax assets associated with those jurisdictions that file consolidated returns. As a result, we released $6.6 million of the deferred tax asset valuation allowance and recognized an additional benefit of $2.8 million related to tax windfall benefits generated in the nine months ended September 30, 2017. These tax benefits were partially offset by tax expense in the amount of $1.5 million recorded based on the estimated annual effective tax rate.

 

For the nine months ended September 30, 2016, we recognized tax expense of $11 thousand, which resulted in an effective tax rate of (5.3%). We recorded the tax provision based on the estimated annual effective tax rate expected for the full year which included Federal alternative minimum tax, current state taxes and deferred tax expense associated with indefinite-lived deferred tax liabilities for goodwill amortization, in addition to a change in the valuation allowance related to deferred tax assets for income generated in the current period.

40


 

 

NON-GAAP FINANCIAL MEASURES

 

Adjusted EBITDA

 

To provide investors with additional information about our financial results, we disclose Adjusted EBITDA, a non-GAAP financial measure. Adjusted EBITDA consists of net income (loss) plus certain other expenses, which includes interest expense, provision (benefit) for income tax, depreciation and amortization, loss on extinguishment of debt, change in fair value of acquisition-related contingent consideration (income) expense, change in fair value of warrant liability, acquisition-related expense, payroll tax expense related to stock option exercises, and stock-based compensation expense. We present Adjusted EBITDA because it is one of the measures used by our management and board of directors to understand and evaluate our core operating performance, and we consider it an important supplemental measure of performance. We believe this metric is commonly used by the financial community, and we present it to enhance investors' understanding of our operating performance and cash flows. We believe Adjusted EBITDA provides investors and other users of our financial information consistency and comparability with our past financial performance and facilitates period-to-period comparisons of operations.

 

Our management uses Adjusted EBITDA:

 

·

as a measure of operating performance to assist in comparing performance from period to period on a consistent basis;

·

to prepare and approve our annual budget; and

·

to develop short- and long-term operational plans

 

Adjusted EBITDA is not in accordance with, or an alternative to, measures prepared in accordance with GAAP. In addition, this non-GAAP measure is not based on any comprehensive set of accounting rules or principles. As a non-GAAP measure, Adjusted EBITDA has limitations in that it does not reflect all of the amounts associated with our results of operations as determined in accordance with GAAP. In particular:

 

·

although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements;

·

Adjusted EBITDA does not reflect cash interest income or expense;

·

Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

·

Adjusted EBITDA does not reflect the potentially dilutive impact of stock-based compensation;

·

Adjusted EBITDA does not reflect tax payments that may represent a reduction in cash available to us; and

·

other companies, including companies in our industry, may calculate Adjusted EBITDA or similarly titled measures differently, which reduces its usefulness as a comparative measure.

 

Because of these and other limitations, you should consider Adjusted EBITDA alongside other GAAP-based financial performance measures, including various cash flow metrics, net income (loss) and our other GAAP financial results and not in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. You should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in the presentation, and we do not intend to imply that our future results will be unaffected by unusual or non-recurring items.

 

41


 

The following is a reconciliation of Adjusted EBITDA to our net income (loss) for the periods presented:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 

 

Nine Months Ended September 30, 

 

 

    

2017

    

2016

    

2017

    

2016

    

Reconciliation of net income (loss) to Adjusted EBITDA

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

7,695

 

$

(142)

 

$

3,350

 

$

(219)

 

Add:

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in fair value of warrant liability

 

 

 —

 

 

(626)

 

 

 —

 

 

(639)

 

Interest expense

 

 

174

 

 

1,242

 

 

327

 

 

4,250

 

Loss on extinguishment of debt

 

 

 —

 

 

1,396

 

 

 —

 

 

1,396

 

Income tax (benefit) expense

 

 

(8,105)

 

 

(164)

 

 

(7,845)

 

 

11

 

Depreciation and amortization

 

 

2,166

 

 

1,276

 

 

5,730

 

 

3,415

 

Change in fair value of acquisition-related contingent consideration expense

 

 

923

 

 

47

 

 

960

 

 

146

 

Acquisition-related expense

 

 

855

 

 

 —

 

 

855

 

 

 —

 

Payroll tax expense related to stock option exercises

 

 

 —

 

 

 —

 

 

95

 

 

 —

 

Stock-based compensation expense

 

 

939

 

 

223

 

 

7,776

 

 

481

 

Adjusted EBITDA

 

$

4,647

 

$

3,252

 

$

11,248

 

$

8,841

 

 

Adjusted Diluted Net Income Per Share Attributable to Common Stockholders, or Adjusted Diluted EPS

 

Adjusted Diluted EPS excludes the impact of certain items and, therefore, has not been calculated in accordance with GAAP.  We believe the exclusion of these items assists in providing a more complete understanding of our underlying operations results and trends and allows for comparability with our peer company index and industry and to be more consistent with our expected capital structure on a going forward basis. Our management uses this measure along with corresponding GAAP financial measures to manage our business and to evaluate our performance compared to prior periods and the marketplace. We define Adjusted Diluted EPS as net income attributable to common stockholders before accretion of redeemable convertible preferred stock, fair value adjustments related to the remeasurement of warrant liabilities, loss on extinguishment of debt, fair value adjustments for acquisition-related contingent consideration, acquisition related expense, payroll tax expense related to stock option exercises, stock-based compensation expense, and the tax impact of those items as well as adjustments for tax benefits related to the partial release of our valuation allowance and recognition of tax windfall benefits expressed on a per share basis using weighted average diluted shares outstanding.

 

Adjusted Diluted EPS is a non-GAAP financial measure and should not be considered in isolation or as a substitute for financial information provided in accordance with GAAP. This non-GAAP financial measure may not be computed in the same manner as similarly titled measures used by other companies. In the future, we may incur expenses that are the same as or similar to some of the adjustments in the presentation, and we do not intend to imply that our future results will be unaffected by unusual or non-recurring items.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

42


 

The following table reconciles net loss per share attributable to common stockholders on a diluted basis, the most directly comparable GAAP measure, to Adjusted Diluted EPS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 

 

Nine Months Ended September 30, 

 

 

    

2017

    

2016

    

2017

 

2016

 

 

 

(In thousands except per share amounts)

 

(In thousands except per share amounts)

 

Reconciliation of diluted net income (loss) per share attributable to common shareholders to Adjusted Diluted EPS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Net income (loss)

 

$

7,695

 

 

 

 

$

(142)

 

 

 

 

$

3,350

 

 

 

 

$

(219)

 

 

 

 

Decretion of redeemable convertible preferred stock

 

 

 —

 

 

 

 

 

2,641

 

 

 

 

 

 —

 

 

 

 

 

2,439

 

 

 

 

Undistributed income attributable to redeemable convertible preferred stockholders

 

 

 —

 

 

 

 

 

(1,271)

 

 

 

 

 

 —

 

 

 

 

 

(1,140)

 

 

 

 

Net income attributable to common stockholders, basic, and net income per share attributable to common stockholders, basic

 

$

7,695

 

$

0.46

 

$

1,228

 

$

0.25

 

$

3,350

 

$

0.20

 

$

1,080

 

$

0.22

 

Decretion of redeemable convertible preferred stock

 

 

 —

 

 

 

 

 

(2,641)

 

 

 

 

 

 —

 

 

 

 

 

(2,439)

 

 

 

 

Revaluation of warrant liability, net of tax (1)

 

 

 —

 

 

 

 

 

(661)

 

 

 

 

 

 —

 

 

 

 

 

(675)

 

 

 

 

Adjustment to undistributed income attributable to redeemable convertible preferred stockholders

 

 

 —

 

 

 

 

 

1,271

 

 

 

 

 

 —

 

 

 

 

 

1,140

 

 

 

 

GAAP net income (loss) attributable to common stockholders, diluted, and net income (loss) per share attributable to common stockholders, diluted

 

$

7,695

 

$

0.41

 

$

(803)

 

$

(0.08)

 

$

3,350

 

$

0.18

 

$

(894)

 

$

(0.09)

 

Adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss on extinguishment of debt

 

 

 —

 

 

 

 

 

1,396

 

 

 

 

 

 —

 

 

 

 

 

1,396

 

 

 

 

Change in fair value of acquisition-related contingent consideration expense

 

 

923

 

 

 

 

 

47

 

 

 

 

 

960

 

 

 

 

 

146

 

 

 

 

Acquisition-related expense

 

 

855

 

 

 

 

 

 —

 

 

 

 

 

855

 

 

 

 

 

 —

 

 

 

 

Payroll tax expense on stock option exercises

 

 

 —

 

 

 

 

 

 —

 

 

 

 

 

95

 

 

 

 

 

 —

 

 

 

 

Stock-based compensation expense

 

 

939

 

 

 

 

 

223

 

 

 

 

 

7,776

 

 

 

 

 

481

 

 

 

 

Impact to income taxes (1)

 

 

(8,963)

 

 

 

 

 

(404)

 

 

 

 

 

(9,803)

 

 

 

 

 

(394)

 

 

 

 

Adjusted net income attributable to common stockholders and Adjusted Diluted EPS

 

$

1,449

 

$

0.08

 

$

459

 

$

0.04

 

$

3,233

 

$

0.18

 

$

735

 

$

0.06

 

 

(1)

The impact to taxes was calculated using a normalized statutory tax rate applied to pre-tax income (loss) adjusted for the respective items above and then subtracting the tax provision as determined for GAAP purposes.

 

The following table reconciles the diluted weighted average shares of common stock outstanding used to calculate net loss per share attributable to common stockholders on a diluted basis for GAAP purposes to the diluted weighted average shares of common stock outstanding used to calculate Adjusted Diluted EPS:

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30, 

 

September 30, 

 

 

    

2017

    

2016

    

2017

    

2016

    

Reconciliation of weighted average shares of common stock outstanding, diluted, to weighted average shares of common stock outstanding, diluted for Adjusted Diluted EPS

 

 

 

 

 

 

 

 

 

Weighted average shares of common stock outstanding

 

16,699,102

 

4,918,885

 

16,483,169

 

4,817,285

 

Effect of potential dilutive securities:

 

 

 

 

 

 

 

 

 

Weighted average dilutive effect of stock options

 

1,235,883

 

 —

 

1,308,202

 

 —

 

Weighted average dilutive effect of restricted shares

 

711,046

 

 —

 

607,988

 

 —

 

Weighted average dilutive effect of common shares from warrants

 

 —

 

 —

 

12,441

 

 —

 

Dilutive effect from preferred stock and preferred stock warrants assuming conversion at beginning of the year

 

 —

 

5,414,838

 

 —

 

5,414,765

 

Weighted average shares of common stock outstanding, basic and diluted for GAAP

 

18,646,031

 

10,333,723

 

18,411,800

 

10,232,050

 

Adjustments:

 

 

 

 

 

 

 

 

 

Weighted average dilutive effect of stock options

 

 

1,994,389

 

 —

 

1,983,298

 

Weighted average dilutive effect of common shares from stock warrants

 

 

203,486

 

 —

 

266,501

 

Weighted average dilutive effect of restricted stock

 

 

3,221

 

 —

 

1,081

 

Weighted average shares of common stock outstanding, diluted for Adjusted Diluted EPS

 

18,646,031

 

12,534,819

 

18,411,800

 

12,482,930

 

 

 

 

 

 

43


 

Liquidity and Capital Resources

 

We earned net income of $3.4 million and incurred a net loss of $0.2 million for the nine months ended September 30, 2017 and 2016, respectively. Our primary liquidity and capital requirements are for research and development, sales and marketing, general and administrative expenses, debt service obligations and strategic business acquisitions. We have funded our operations, working capital needs and investments with cash generated through operations, issuance of stock and borrowings under our credit facilities. At September 30, 2017, we had cash of $5.9 million.

 

Summary of Cash Flows

 

The following table shows a summary of our cash flows for the nine months ended September 30, 2017 and 2016.

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

September 30, 

 

 

    

2017

    

2016

    

Net cash provided by operating activities

 

$

11,700

 

$

2,477

 

Net cash used in investing activities

 

 

(39,293)

 

 

(4,977)

 

Net cash provided by financing activities

 

 

29,187

 

 

2,267

 

Net increase (decrease) in cash

 

$

1,594

 

$

(233)

 

 

Operating Activities

 

Net cash provided by operating activities was $11.7 million for the nine months ended September 30, 2017 and consisted primarily of our net income of $3.4 million and the addition of noncash items of $6.4 million and by changes in our operating assets and liabilities totaling $1.9 million. The noncash items primarily included $7.8 million of stock-based compensation expense, which was primarily related to shares of restricted common stock that were granted to certain employees in 2016 and stock options granted to employees, and $5.7 million of depreciation and amortization expenses related to leasehold improvements, capital equipment, capitalized internal-use software development costs, and acquisition related intangibles. The addition of noncash items was partially offset by an $8.1 million change in deferred taxes primarily due to the release of a significant portion of the deferred tax asset valuation allowance and recognition of an additional benefit related to tax windfall benefits generated in the nine months ended September 30, 2017. These tax benefits were offset by tax expense calculated based on the estimated annual effective tax rate. See Note 11 for additional information. The significant factors that contributed to the change in operating assets and liabilities included an increase in accrued expenses and other liabilities as a result of higher employee compensation and benefits accruals as of September 30, 2017, and an increase in other long-term liabilities due to cash allowances we received for leasehold improvements related to our new space in South Carolina dedicated to software development, which we began to occupy in June 2017. The increase in accrued expenses and other long-term liabilities was partially offset by an increase in accounts receivable primarily due to new revenues generated from our MRM Service Contracts during 2017.

 

Net cash provided by operating activities was $2.5 million for the nine months ended September 30, 2016 and consisted primarily of our net loss of $219 thousand, offset by the addition of noncash items of $6.0 million and changes in our operating assets and liabilities totaling $562 thousand, partially offset by cash payments of $3.9 million for imputed interest on debt. The noncash items primarily included depreciation and amortization expenses related to leasehold improvements, capital equipment, capitalized internal-use software development costs, and acquisition related intangibles of $3.4 million, amortization of deferred financing fees and debt discounts of $1.3 million, loss on extinguishment of debt of $1.4 million, stock-based compensation expense of $481 thousand, and an expense of $146 thousand for the revaluation of acquisition contingent consideration, which were partially offset a decrease in the fair value of warrant liabilities of $639 thousand. The significant factors that contributed to the change in operating assets and liabilities primarily included a net increase in accrued expenses and other long-term liabilities for deferred rent expense related to our new office location for our headquarters. Cash provided by operating activities was also impacted by a decrease in rebates receivable due to a new rebate program from our inventory vendors in 2016, which was partially offset by an increase in accounts receivable due to an increased customer base and higher sales volumes.

 

 

 

 

44


 

Investing Activities

 

Net cash used in investing activities was $39.3 million for the nine months ended September 30, 2017 and $5.0 million for the nine months ended September 30, 2016. Net cash used in investing activities for the nine months ended September 30, 2017 reflected $34.5 million, net of cash acquired, paid in connection with the acquisition of SRx. In addition, net cash used in investing activities included $2.6 million in purchases of property, equipment and leasehold improvements, primarily related to our office space and headquarters in Moorestown, NJ, our new space in South Carolina dedicated to software development, and new space in South San Francisco dedicated to pharmacy dispensing, which we began to occupy in February 2017. Net cash used in investing activities also consisted of $2.2 million in software development costs.

 

Investing activities for the nine months ended September 30, 2016 reflects $2.9 million in purchases of property, equipment and leasehold improvements primarily related to our new office location for our headquarters, $1.2 million in software development costs, and $1 million payment related to the acquisition of certain assets of 9176-1916 Quebec Inc., which were partially offset by a decrease of $200 thousand in restricted cash from the release of funds for the final acquisition consideration payment related to the acquisition of St. Mary Prescription Pharmacy, or SMPP, in 2014.

 

Financing Activities

 

Net cash provided by financing activities was $29.2 million for the nine months ended September 30, 2017 compared to cash provided by financing activities of $2.3 million for the nine months ended September 30, 2016. Financing activities for the nine months ended September 30, 2017 primarily reflected net borrowings of $35 million from the Amended and Restated 2015 Line of Credit and $194 thousand of proceeds from the exercise of stock options, offset by $2.1 million in payments for payroll taxes remitted to taxing authorities on behalf of employees from shares withheld from the net exercise of stock options during 2017. Net cash used in financing activities also included a $1.5 million payment of contingent purchase price consideration related to our Medliance acquisition and $550 thousand of payments related to our acquisition related consideration for 9176-1916 Quebec Inc., $959 thousand in payments for the repurchase of common stock, $525 thousand in payments of long-term debt, $220 thousand in payments for debt financing costs, and $132 thousand in payments for deferred offering costs.

 

Net cash provided by financing activities for the nine months ended September 30, 2016 primarily reflect the repayment of $14.3 million of notes payable related to the Medliance acquisition, $13.6 million in payments of long-term debt, $2.2 million in payments for costs associated with the IPO, $2.1 million in payments of deferred and contingent purchase price consideration related to our SMPP and Medliance acquisitions, and $1.5 million in payments for debt financing costs. Net cash used in financing activities was offset by net borrowings of $30 million from the ABC Credit Facility and net borrowings of $6 million from the Amended and Restated 2015 Line of Credit.

 

Funding Requirements

 

We had an accumulated deficit of $31.6 million as of September 30, 2017. As a result of the IPO, which closed on October 4, 2016, we are a publicly traded company and will incur significant legal, accounting and other expenses that we were not required to incur as a private company. In addition, the Sarbanes-Oxley Act, as well as rules adopted by the SEC and NASDAQ Stock Market, require public companies to implement specified corporate governance practices that were not applicable to us as a private company. We expect these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly.

 

We believe that our cash of $5.9 million as of September 30, 2017, borrowing capacity under our Amended and Restated 2015 Line of Credit and cash flows from continuing operations will be sufficient to fund our planned operations through at least December 31, 2018. Our ability to maintain successful operations will depend on, among other things, new business, the retention of clients and the effectiveness of sales and marketing initiatives.

 

We may seek additional funding through public or private debt or equity financings. We may not be able to obtain financing on acceptable terms, or at all. The terms of any financing may adversely affect our stockholders. If we are unable to obtain funding, we could be forced to delay, reduce or eliminate our research and development programs, product portfolio expansion or commercialization efforts, which could adversely affect our business prospects. There is

45


 

no assurance that we will be successful in obtaining sufficient funding on terms acceptable to us to fund continuing operations, if at all.

 

Revolving Credit Facility

 

On September 6, 2017, we entered into an Amended and Restated 2015 Line of Credit whereby we amended our amended revolving line of credit, which was entered into on April 29, 2015 and amended on July 1, 2016.  The Amended and Restated 2015 Line of Credit provides for borrowings in an aggregate amount up to $40.0 million to be used for general corporate purposes, with a $1.0 million sublimit for cash management services and letters of credit and foreign exchange transactions. We may also request an increase in the size of the Amended and Restated 2015 Line of Credit by up to $10.0 million upon the successful syndication of such additional amounts. Amounts outstanding under the Amended and Restated 2015 Line of Credit bear interest at a variable rate based upon Western Alliance Bank's prime rate plus an applicable margin which will range from (0.25%) to 0.25%, with Western Alliance Bank's prime rate having a floor of 3.5%. The Amended and Restated 2015 Line of Credit has a maturity date of September 6, 2020, and is secured by all of our personal property, whether presently existing or created or acquired in the future, as well as our intellectual property. As of September 30, 2017, there was $35.0 million outstanding under the Amended and Restated 2015 Line of Credit.

 

The Amended and Restated 2015 Line of Credit contains financial covenants, including covenants requiring us to maintain a minimum unrestricted cash and unused availability balance under the Amended and Restated 2015 Line of Credit, maintain a maximum leverage ratio on a trailing twelve-month basis measured quarterly, and a minimum EBITDA, measured quarterly. The Amended and Restated 2015 Line of Credit also contains operating covenants, including covenants restricting our ability to effect a sale of any part of our business, merge with or acquire another company, incur additional indebtedness, encumber or assign any right to or interest in our property, pay dividends or other distributions, make certain investments, transact with affiliates outside of the ordinary course of business and incur annual capital expenditures, excluding capitalized software development costs and tenant leasehold improvements, in excess of $5.0 million. The Amended and Restated 2015 Line of Credit contains customary events of default, including upon the occurrence of a payment default, a covenant default, a material adverse change, our insolvency and judgments against us in excess of $500 thousand that remain unsatisfied for 30 days or longer. The Amended and Restated 2015 Line of Credit provides for a ten-day cure period for a covenant breach, which may be extended to up to 30 days in certain circumstances. As of September 30, 2017, we were in compliance with all of the financial covenants related to the Amended and Restated 2015 Line of Credit and expect to remain in compliance with such covenants.

Contractual Obligations and Commitments

 

During the three and nine months ended September 30, 2017, there were no material changes to our contractual obligations and commitments as compared to those described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Contractual Obligations and Commitments” in our Annual Report on Form 10-K for the year ended December 31, 2016.

 

Off-Balance Sheet Arrangements

 

During the periods presented, we did not have any off-balance sheet arrangements, as defined by applicable SEC rules and regulations.

 

Critical Accounting Policies and Significant Judgments and Estimates

 

Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles. The preparation of these consolidated 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 consolidated financial statements, as well as the reported revenue generated and expenses incurred during the reporting periods. Our estimates are based on our 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. Actual results may differ from these estimates under different assumptions or conditions.

 

46


 

There have been no material changes in our critical accounting policies during the three and nine months ended September 30, 2017, as compared to those disclosed in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Significant Judgments and Estimates” in our Annual Report on Form 10-K for the year ended December 31, 2016.

 

Recent Accounting Pronouncements

 

See Note 2 in this Quarterly Report on Form 10-Q and Note 2 in the Annual Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2016 for a description of new accounting pronouncements.

 

 

Item 3. Quantitative and Qualitative Disclosure about Market Risk

 

We are exposed to market risks in the ordinary course of our business. Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risks are principally limited to interest rate fluctuations.

 

As of September 30, 2017, we had $35.0 million outstanding under our Amended and Restated 2015 Line of Credit. We entered into the Amended and Restated 2015 Line of Credit to refinance outstanding indebtedness and to fund acquisition-related activities. Interest on the loan is based on the lender's prime rate plus an applicable margin, with the lender's prime rate having a floor of 3.5%, which exposes us to market risk due to changes in interest rates. This means that a change in the prevailing interest rates may cause our periodic interest payment obligations to fluctuate. We believe that a one percentage point increase in interest rates would result in an approximate $24 thousand increase to our interest expense for the nine months ended September 30, 2017

 

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

As required by Rule 13a-15(b) and Rule 15d-15(b) of the Exchange Act, our management, including our principal executive officer and our principal financial officer, conducted an evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective at the reasonable assurance level in ensuring that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports we file under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

 

Inherent Limitations on Effectiveness of Controls and Procedures

 

Internal control over financial reporting may not prevent or detect all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Also, projections of any evaluation of effectiveness of internal control 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. Accordingly, our disclosure controls and procedures are designed to provide reasonable, not absolute, assurance that the objectives of our disclosure control system are met.

 

Changes in Internal Control Over Financial Reporting

There have not been any changes in our internal control over financial reporting during the quarter ended September 30, 2017 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

47


 

PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings

 

We are not currently party to any material legal proceedings. From time to time, however, we may be a party to litigation and subject to claims in the ordinary course of business. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.

 

Item 1A. Risk Factors

 

In addition to the other information set forth in this report, stockholders and potential investors in our securities should carefully consider the risk factors set forth in Part I, “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2016, which was filed with the Securities and Exchange Commission on March 14, 2017. We have identified these risk factors as important factors that could cause our actual results to differ materially from those contained in any written or oral forward-looking statements made by us or on our behalf. Other than as set forth below, there have been no material changes to such risk factors previously disclosed in our Annual Report.

 

We face additional risks as a result of the Acquisition of SRx and may be unable to integrate our businesses successfully and realize the anticipated synergies and related benefits of the Acquisition or do so within the anticipated timeframe.

On September 6, 2017, we completed our acquisition of SRx. The acquisition involved a combination of two companies that previously operated as independent companies, and, as a result of the acquisition, the combined company faces various additional risks, including, among others, the following:

 

·

our inability to successfully evaluate and utilize SRx’s products, services, technology or personnel;

·

disruption to SRx’s business and operations and relationships with service providers, customers, employees and other partners;

·

negative effects on our products, product pipeline and services from the changes and potential disruption that may follow the acquisition;

·

diversion of our management’s attention from other strategic activities;

·

our inability to successfully combine the businesses in a manner that permits the combined company to achieve the cost savings anticipated to result from the acquisition;

·

diversion of significant resources from the ongoing development of our existing products, services and operations; and

·

greater than anticipated costs related to the integration of SRx’s business and operations into ours.

Our ability to execute all such plans will depend on various factors, many of which remain outside our control. Any of these risks could adversely affect our business and financial results.

 

The process of integrating SRx’s operations into our operations could result in unforeseen operating difficulties and require significant resources.

The following factors, among others, could reduce our revenues and earnings, increase our operating costs, and result in a loss of projected synergies:

 

·

if we are unable to successfully integrate the duties, responsibilities, and other factors of interest to the management and employees of the acquired business, we could lose employees to our competitors, which could significantly affect our ability to operate the business and complete the integration;

48


 

·

if we are unable to implement and retain uniform standards, controls, policies, procedures and information systems; and

·

if the integration process causes any delays with the delivery of our services, or the quality of those services, we could lose customers, which would reduce our revenues and earnings.

The process of integrating SRx and its associated services and technologies involves numerous risks that could materially and adversely affect our results of operations or stock price.

The following factors, among others, could materially and adversely affect our results of operations or stock price:

·

expenses related to the acquisition process and impairment charges to goodwill and other intangible assets related to the acquisition;

·

the dilutive effect on earnings per share as a result of issuances of stock and incurring operating losses;

·

stock volatility due to investors’ uncertainty regarding the value of SRx;

·

diversion of capital from other uses;

·

failure to achieve the anticipated benefits of the acquisition in a timely manner, or at all; and

·

adverse outcome of litigation matters or other contingent liabilities assumed in or arising out of the acquisition.

Notwithstanding the due diligence investigation we performed in connection with the Acquisition, SRx may have liabilities, losses, or other exposures for which we do not have adequate insurance coverage, indemnification, or other protection.

While we performed significant due diligence on SRx prior to consummating the acquisition, we are dependent on the accuracy and completeness of statements and disclosures made or actions taken by SRx and its representatives when conducting due diligence and evaluating the results of such due diligence.  We did not control and may be unaware of activities of SRx before the acquisition, including intellectual property and other litigation claims or disputes, information security vulnerabilities, violations of laws, policies, rules and regulations, commercial disputes, tax liabilities and other known and unknown liabilities.

 

Our post-closing recourse is limited under the Merger Agreement.

SRx’s obligation to indemnify us is limited to, among others, breaches of specified representations and warranties and covenants included in the Merger Agreement and other specific indemnities as set forth in the Merger Agreement. Except in the event SRx breaches a Fundamental Representation (as defined in the Merger Agreement) or with respect to fraud, intentional misrepresentation or willful misconduct, we cannot make a claim for indemnification pursuant to the Merger Agreement with respect to representations and warranties unless and until the indemnifiable losses exceed $337,500 and we cannot make a claim against SRx for a breach of a non-Fundamental Representation after the date that is 18 months after the date of closing of the acquisition.  In connection with the acquisition, we obtained a representation and warranty insurance policy but we cannot make a claim under this policy for a breach of a non-Fundamental Representation after the date that is three years after the date of closing of the acquisition or a breach of a Fundamental Representation or certain tax obligations after the date that is six years after the date of the closing of the acquisition.  If any issues arise post-closing, we may not be entitled to sufficient, or any, indemnification or recourse from SRx or our representation and warranty insurance policy, which could have a material adverse impact on our business and results of operations.

The success of SRx depends on a license with the University of Arizona. If the University of Arizona chooses to terminate the license, our business and operations could be harmed.

 

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On September 6, 2017, we completed our acquisition of SRx. SRx licenses certain software and related user documentation related to SRx's Medication Management Center from the University of Arizona, or the Arizona License. The Arizona License is an exclusive, sublicensable license within the United States. The majority of SRx's business is dependent on the software licensed under the Arizona License. The University of Arizona may terminate the Arizona License under certain circumstances, including if SRx breaches the Arizona License and does not cure such breach within 60 days, ceases the commercial use of the licensed software, or liquidates its business. The termination of the Arizona License could significantly disrupt SRx's business operations and may adversely affect our operating results. In the event of a termination, SRx may be unable to fulfill its responsibilities to customers or meet the expectations of customers, with the potential for liability claims and a loss of business reputation, and a loss of business reputation, loss of ability to attract or maintain customers, and reduction of our revenue or operating margin.

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

Not applicable

 

 

Item 3. Defaults Upon Senior Securities

 

Not applicable.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

Not applicable.

 

50


 

Item 6. Exhibits

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Incorporated by Reference 

 

Filed Herewith 

Exhibit

No. 

 

Exhibit Description 

 

Form 

 

Filing Date 

 

Exhibit Number 

 

 

  

  

  

  

  

  

  

  

  

  

  

2.1

 

Agreement and Plan of Merger, dated September 6, 2017, by and among Tabula Rasa HealthCare, Inc., TRCRD, Inc., TRSHC Holdings, LLC, Sinfonia HealthCare Corporation, Michael Deitch, Fletcher McCusker and Michael Deitch, as Stockholders’ Representative

 

8-K

 

9/7/2017

 

2.1

 

 

3.1

  

Amended and Restated Certificate of Incorporation of Tabula Rasa HealthCare, Inc.

  

8-K

  

8/4/2016

  

3.1

  

 

3.2

 

Amended and Restated Bylaws of Tabula Rasa HealthCare, Inc.

 

8-K

  

8/4/2016

 

3.2

 

 

4.1

 

Investor Rights Agreement, dated as of June 30, 2014

 

S-1

 

1/4/2016

 

4.1

 

 

4.2

 

Stockholders Agreement (as amended)

 

S-1/A

 

7/21/2016

 

4.2

 

 

4.3

 

Amended and Restated Preferred Series A-1 Convertible Stock Warrant, dated as of April 21, 2016, issued to the New Jersey Economic Development Authority

 

S-1/A

 

7/21/2016

 

4.8

 

 

10.1

 

Amended and Restated Loan and Security Agreement, dated September 6, 2017, by and among CareKinesis, Inc., Tabula Rasa HealthCare, Inc., Careventions, Inc., Capstone Performance Systems, LLC, J.A. Robertson, Inc., Medliance LLC, CK Solutions, LLC, SinfoníaRx, Inc., Sinfonía HealthCare Corporation, TRCRD, Inc., TRSHC Holdings, LLC, the several banks and other financial institutions or entities from time to time party thereto, and Western Alliance Bank, as a Lender and as administrative agent and collateral agent for the Lenders

 

8-K

 

9/7/2017

 

10.1

 

 

10.2#

 

License Agreement and Asset Transfer, effective as of December 9, 2013, by and between The Arizona Board of Regents on behalf of The University of Arizona and Sinfonía HealthCare Corporation

 

 

 

 

 

 

 

X

10.3

 

First Amendment to License Agreement and Asset Transfer, dated December 8, 2014, by and between The Arizona Board of Regents on behalf of The University of Arizona and Sinfonía HealthCare Corporation

 

 

 

 

 

 

 

X

31.1

 

Certification of Chief Executive Officer (Principal Executive Officer) required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

 

 

 

 

X

31.2

 

Certification of Chief Financial Officer (Principal Financial Officer) required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

 

 

 

 

X

32.1*

 

Certification of Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial Officer), as required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. §1350), as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

 

 

 

 

X

101.INS

  

XBRL Instance Document

  

 

  

 

  

 

  

X

101.SCH

  

XBRL Taxonomy Extension Schema Document

  

 

  

 

  

 

  

X

101.CAL

  

XBRL Taxonomy Extension Calculation Linkbase

  

 

  

 

  

 

  

X

101.DEF

  

XBRL Taxonomy Extension Definition Linkbase

  

 

  

 

  

 

  

X

101.LAB

  

XBRL Taxonomy Extension Label Linkbase

  

 

  

 

  

 

  

X

101.PRE

  

XBRL Taxonomy Extension Presentation Linkbase

  

 

  

 

  

 

  

X

 

#  Application has been made to the Securities and Exchange Commission for confidential treatment of certain provisions. Omitted material for which confidential treatment has been requested has been filed separately with the Securities and Exchange Commission.

 

* This certification attached as Exhibit 32.1 that accompanies this Quarterly Report on Form 10-Q is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of Tabula Rasa HealthCare, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of this Form 10-Q), irrespective of any general incorporation language contained in such filing.

51


 

Signatures

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

 

 

TABULA RASA HEALTHCARE, INC.

 

 

 

Date: November 9, 2017

By:

/s/ DR. CALVIN H. KNOWLTON

 

Name:

Dr. Calvin H. Knowlton

 

Title:

Chief Executive Officer

(Principal Executive Officer)

 

 

 

Date: November 9, 2017

By:

/s/ BRIAN W. ADAMS

 

Name:

Brian W. Adams

 

Title:

Chief Financial Officer

 

 

(Principal Financial and Accounting Officer)

 

 

 

52